Financial Market Meltdown
Posted on October 10, 2008 Comments (9)
The financial market meltdown has grown to the point where it has profound ramifications for everyone. The common wisdom for financial market variation, for most of us, is just to focus on the long term and don’t worry about short term fluctuations. That is good advice. This panic is threatening to override that wisdom however. There are at least 2 areas to consider: personal finance and business prospects (how managers need to take this crisis into account).
On personal finance I still believe the same smart personal financial decisions last year, or five years ago are wise today: avoid credit card debt, have an emergency fund of 6 months of expenses, save for retirement, have proper health insurance, don’t buy what you don’t need and can’t afford… The biggest change I see is that the risks of failing to do these things (and the risks of failing to have done them in the past) are increasing greatly.
One of the challenges with personal financial matters is they are by nature long term issues. What you did over the last 5 years cannot be fixed in a few weeks, most likely it takes years. For more details follow the links in the paragraph above (to posts on the Curious Cat Investing and Economics Blog). You can’t make much progress quickly on these matters if you failed to do so over the last 5 years. However, you can at the very least start doing so now and you can even go a bit further if you were doing well (I am seriously considering raising my retirement contributions to take advantage of low stock prices).
On the impact to management area, this crisis has reached the point at many companies that managers not involved in finance have already been dealing much more with the importance of cash flow. And all indications indicate the risks related to manage cash flow are increasing dramatically. The expected sources of cash to provide for long term investments, for medium term investments and even short term cash flow needs are disappearing in a way I don’t think anyone predicted was possible.
What will happen in the next 1-6 months is very hard to predict. Most likely the credit markets will recover some (it is hard to imagine they could stay this broken). But to what extent is hard to say. And the real business risks of almost unimaginable (anytime the last 70 years anyway) problems raising cash, require managers to evaluate how to react today based on these risks. Even a month ago, for most businesses (outside of the financial industry or those with extremely heavy financing needs) this was not likely a consideration.
I don’t have suggestions, in this post, for what those reactions should be other than to focus on cash flow, not earnings, but cash. I do believe businesses need to start evaluating how they would cope with scenarios not imaginable even a few months ago. I actually have a more positive outlook on what I think will happen than many do. But the risks of extreme cases are becoming more and more likely each day. And planning for them needs to start, if you are not one of the very few companies that seriously planned for such conditions previously.
A fundamental aspect of the Toyota Production System (which lean manufacturing is derived from – but this particular aspect is missing from most lean manufacturing initiatives) is planning to survive perilous times (see Don’t Fear Opportunity Losses pages 21-23 [this really isn’t the greatest example of what I mean but I can’t find another reference right now] of Taiichi Ohno’s Workplace Management – and excellent book). A core value of Toyota is not to find themselves where they were when they were forced to layoff workers to survive to even hope to survive as a company. If the financial market panic continues we will see how well they have held to that principle. It is very challenging to remain focused after decades of great success on keeping the organization designed to survive well in extremely bad circumstances.
I am buying stocks now: Google (GOOG), Templeton Dragon Fund (TDF), Toyota (TM) and ATP Oil (ATPG). The first three I am happy to buy and hold for 10 years. And plan to buy more over time (I am far from certain prices will not go lower from this point). Another piece of conventional wisdom is you don’t buy when stock prices are collapsing (try to “catch a falling knife”). Time will see if I was foolish to do so. To me, prices are looking like values (buy when there “is blood in the street” “buy when everyone else is selling”) but timing frenzy driven markets is basically impossible. A year after a market recovery has started it is easy to see how wise it would have been to buy a year ago.