Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. He also writes a blog for hbr.org and is a contributor to Time magazine. Before joining HBR Group in 2010, he wrote a weekly column for Time and created the Curious Capitalist blog for Time.com. Previously, Fox spent more than a decade working as a writer and editor at Fortune magazine, where he covered economics, finance, and international business.
One of the defining characteristics of the markets through the summer of 2010 has been a continued stream of mixed messages. Surges forward in one week turn into a rout the next week. Under these circumstances, with the outlook this confused, companies have a tendency to put projects and plans on hold until the view ahead becomes clearer. You have argued that instead companies should look at a time of uncertainty as offering opportunity. Why?
It’s not just market signals that are unclear. In the United States since the election of the Obama Administration we have had a good deal of complaining by the US business community about political uncertainty too. The argument, often championed by the less than politically neutral US Chamber of Commerce, is that the ambitious legislative agenda of the Obama Administration and the Democratic Congress is making it hard for businesses to know what sort of environment they will be operating in a couple of years from now.
It is, of course, true that constant rule changing by government does make it harder for both businesses and individuals to make investment decisions, but with the Democrats taking control of both Congress and the White House for the first time in 16 years, rule changes were inevitable. You can criticize the new rules, but berating legislators for the very act of legislating seems a little weird.
Also, with respect to both political and market uncertainty, it’s important to remember that uncertainty offers companies an opportunity to differentiate themselves from the competition. History shows that the largest rewards are there to be reaped in troubled times. By contrast, investments made at the height of a boom period, when companies have a great deal of confidence that they can see the way forward, frequently turn out, with the benefit of hindsight, to be disastrous.
Bubbles are a classic case. Markets, and the companies that comprise those markets, take a very myopic view. There are all kinds of factors that do not get correctly priced in to people’s calculations while a bubble is going through its inflationary cycle. In particular, the risk that the bubble will burst is almost invariably not priced in to company thinking. My advice to the CEOs of companies, then, is to stop blaming the fog and instead be the guys who did better than the opposition in the fog. In particular, forget about political uncertainty. The forces creating the real uncertainty out there are so much bigger than the issue of who is in power in Washington.
It seems clear that the way in which the US economy will get out of this recession is by businesses being successful in what they do, and they can best achieve this by putting some big bets on what they think is coming next, and in being right about that. This is about companies knowing their particular markets and being bold. I do get that people in many industries are not particularly enthused about what the markets seem to be offering them by way of opportunities, but it is a fact that those who act decisively now are more likely to enjoy spectacular payoffs later down the track, while those who sit on their hands through the fog certainly will not. They may not lose money directly, but they will lose opportunities, which comes to the same thing in the long run.