Thursday, August 12, 2010

Magic Thinking

I didn’t win MegaMillions this week. Living by the motto that you have to “be in it to win it” I bought 10 tries for the $65 million prize. Nobody won…which somehow is totally satisfying. Why play the lottery? I have magic thinking syndrome.

Magic thinking syndrome is not a real disease (according to WebMD). It is, however, part of the human condition. And I am very human. I’ve been thinking about how this syndrome affects us individually, as business people and as citizens.

Some years back I was in a committee meeting for a Church I was working with and we were looking at ways to balance the upcoming years’ budget. When the figures simply were not working I suggested that the expenses would have to be pared. Several of the members of the committee would not consider it. “God will provide,” they said. “Fine,” I said. “Let’s itemize how.” I have faith. I also believe in basic financial principals such as having expenses not exceed income – regardless of whether it’s for a charity, an individual, a business or government.

I have spent the bulk of my career working with entrepreneurs. I have worked with people as they are in the embryonic stages of their business, often with the seed of an idea. I help plant, water, feed and nurture until it becomes a sapling and then a strong tree. Some think they’re building a forest from the get go…even when surrounded by an ocean, or by concrete.

In the early days of the “dot-com” phenomenon I sat in the living room of two entrepreneurs who engaged me to write their business plan and extrapolate financials based on an idea, without any metrics, supporting documentation or proof of concept. Three days later I delivered a draft. Within a week there was a million-dollar funding commitment. Three months later a fully operational office with computers, furniture and staff was in place. Six months later the business was shuttered. At any one of the stages of this businesses’ life-cycle I would counsel caution…only to have magic happen…amazing us all. Were the investors hoping that this idea would be the miracle that would make them rich…their own magic thinking? Such thinking can perpetuate itself, like Bernie Madoff’s investors (or contributors to Social Security). More than likely we were all caught up in the excitement that created a mini-bubble…a form of group think…and reality became the bubble’s pin-prick.

Excitement and enthusiasm are needed characteristics of business leaders. So too is careful, diligent planning. This is strategic element is missing from many organizations today because it is difficult to quantify the short-term ROI (Return-on-Investment) of strategic planning. It’s not immediately cost-effective. In a few years businesses will be suffering the consequences of having pared back on their long-range thinking. Government already suffers because of its myoptic focus on the next election.

Making aggressive projections is part of building a business, and when based on quantifiable circumstances expectations can be realized. Managing the reality is leadership and the way to minimize failure. Operating within a strategic vision is vital and can lead to making decisions based on present conditions rather than just future opportunities.

A colleague is in the running for his “dream” position. It’s exciting that there are 3 potential offers and he has been courted by one company who flew him to their headquarters to meet with all of the "important" people. Everything and everyone clicked. Excitement was building. Then the CEO said he had to wait 2 weeks for an offer. The fantasy of the situation is that a huge offer with every conceivable benefit will arrive as scheduled. The optimist interpretation justifies the delay and expects the industry-standard offer to arrive. The realist is talking to the other 2 companies assuming that there’s something wrong with the third. The pessimist has written the whole damn thing off and is watching daytime television and eating popcorn. All of us have a bit of each type in us and finding the balance in each situation is what we must do individually, as businesses and as a citizenry.

There is no balance in the financial condition of the world right now. There’s a lot of caution and, indeed, a lot of fear. Evidence can support it. Trillions of dollars of wealth has disappeared since 2008. Tens of millions of people are unemployed in the US and even more world-wide. Consumer spending is down. Greece had to be bailed out. Italy may be next. Iceland went bankrupt. England is about to embark on an austerity program unlike anything in recent history. China is loaning money to everybody. When will they start collecting and what will happen if repayment can’t be made? World War III is the worst case scenario and the result of too much “realistic” and “pessimistic” thinking…and the subject of a whole other blog!

In 2006 the worry was about the US Savings rate. It was near zero – occasionally even going into negative territory as US consumers borrowed more than they kept. As of June 30, 2010 the Savings Rate is approx. 5% according to the US Department of Commerce.

This dramatic shift in one economic indicator exemplifies the lack of economic balance. Money is out there. The Fed has printed it. People are saving it. Businesses are reportedly holding $1.8 trillion in cash as of July. There is a lack of confidence in the stability of our individual circumstances so rather than spend it people are holding onto it, which is totally understandable, reasonable and prudent if done as part of plan and not the result of fear. Business reflects its lack of confidence by maximizing efficiencies and profits but not taking any risks with its cash by investing in research, development or planning for what’s next. Government fosters the lack of confidence in two ways, depending on your politics. One way is that Government does nothing and that stymies employer’s ability to invest and grow. The other way is when there are ever-changing regulations, policies and priorities causing disruptions and uncertainty – and ultimately the inability to plan. Neither way works.  Reasoned detailed and long-range plans and implementation is needed from Government so that businesses can invest thus allowing individuals to plan. And it’s magic thinking to think it's going to happen.  We have a political system that seems to be built on marketing rather than policy.

We as a people (individually, as businesses and as citizens) must adapt to the current financial reality and settle into the next present. Then the future can be explored, imagined and realized with specific plans and projections. I know. It’s terribly boring and unlikely to manifest itself. More than likely fantasy and wishful thinking will return and with it a wealth of ideas, products and services and a new bubble will grow only to be punctured. The cycle continues.

Meantime, Vegas beckons.

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