A Consultant's View

Prairie Trail Software, Inc. ............................................................. January 2011

Betting Against the Crowd

Every January, there are a lot of people making predictions about what will happen in the New Year. Instead of making more of them, it may be helpful to consider the words of one oil man, "This business is the only business I know where you can be sure that every decision you make will be wrong."

Instead of making predictions, it can be interesting to identify what not to bet on.

For example, every year there are "hot new markets". Looking at the history of such new markets shows that almost every company in those markets will fail.

We are seeing examples of "sure bets" failing. In Europe, when they established the Euro Zone, many people saw the opportunities in some countries and saw them as "sure bets". If the Irish could have the same economics as Germany and keep their prior style, the investors would have a boom. Well, they did and now the bill is coming due.

Another area where investor see sure bets is indicated by demographics. This is the year that the first "Baby Boomers" hit 65 and it is assumed that they will start retiring. Many people will see that and bet on a company that caters to retirees. The trouble is that, on average, companies that cater to the retirees will do well; there will be a lot of companies that attempt to do so and fail.

It is important to not bet against demographics either. Yes, the Boomers will start retiring. However, many of them do not have the savings to be able to retire in the manner that they expect to. Thus, we will see both Boomers with the ability to have a life of ease in retirement and those who will be in poverty.

In legal circles, we see the same mental process at work. Lawmakers on all sides assume that they can predict how a new law will work. Yet, people will act different from expected. (Thus, we have the "Law of Unintended Consequences.)

Because of both the legal environment and the demographic changes, we will see changes in how companies operate. When we look at Northern Italy, we find many small companies. The reason is that the laws have exemptions for smaller companies. In this country, many of the new laws have exemptions for small businesses. As the laws in the US add more costs and regulations, we may see a similar migration to such smaller companies who work together.

So, as always, when we think we have a sure bet, there can be ways that the bet fails.