Four Inevitable Changes that Threaten Your Business
By Dan Richards
March 25, 2014
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Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More
One of the challenges in long-term business planning is anticipating changes in the environment in which you’ll be operating – it’s hard enough to plan 12 months out, much less five or 10 years. While there’s no way to predict future changes with certainty, there is a simple rule of thumb that is helpful. Known as Stein’s Law, it comes from the late Herbert Stein, chairman of the Council of Economic Advisors under Presidents Nixon and Ford.
That rule of thumb which applies to politics, economics and business: “If something can’t continue, it will stop.” If you step back and look at the status quo in the advisory business and ask yourself what things simply don’t make sense and are unsustainable as a result, you will come up with a surprisingly long list. Today’s article focuses on inevitable changes in the investing environment; next week’s will highlight unsustainable aspects of how advisors run their businesses.
Not if but when
Stein made a deceptively simple case: The moment that you identify the status quo as unsustainable – whether it is interest rates, house prices or deficit spending, you should assume that it will change. It’s not a question of if, but rather when.
With regard to when changes will occur, history teaches us that it’s impossible to predict the timing of that change, in large part because the status quo can persist for longer than the skeptics believe possible. (Just remember how long tech stocks continued their rise in the late 1990s and the way that housing prices defied the skeptics in the mid 2000s.Once change starts to kick in, however, it can assume a life of its own and move much faster than so-called experts believe possible. In the words of a friend who left South Africa after power passed from the white minority to the black majority: “My friends and I always knew that apartheid couldn’t continue forever, but we thought that change would happen in our grandchildren’s lifetime or maybe even in our children’s lifetime– never in ours.”
Stein’s Law at work
Recognizing that things are always clearer after the fact, it’s easy to find recent examples of Stein’s Law at work:
- Some Western observers argued that its inefficiency made the Iron Curtain status quo in the 1980s unsustainable. But even for the doubters, no one foresaw the collapse of the entire European Eastern bloc over only two months in 1989.
- The Arab Spring revolts of 2011 saw power shift in Egypt and other Arab countries. These revolts arrived seemingly overnight with virtually no warning.
- There’s a long list of once-dominant market leaders that fell on hard times … the Big Three auto companies and names like U.S. Steel, Kodak, Polaroid, Sears, Montgomery Ward and Xerox come to mind. In all of these cases, growing customer dissatisfaction, new competitors and a sclerotic resistance to change made those companies vulnerable and inertia and historical dominance masked that vulnerability … until all of a sudden it didn’t. And once their market shares started to slide, the decline rapidly accelerated.
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