Good is the Enema of Great

You will cavil over my crude parody of Jim Collins’ dictum, “good is the enemy of great,”  from his bestseller, Good to Great, but gimme a minute. Collins recounted eleven wonderful stories in the book. The stories were about eleven companies who, faced with severe operating difficulties, made radical changes that transformed them from mediocre businesses into world class corporations. They left their competitors in the dust in the process and, over a fifteen year period, their stocks outperformed the general market by a range of four hundred to, in one case, eighteen hundred percent. The performamces were extraordinary, but they were acts of desperation. Not one of these companies made a serious move to change the business until they  were on the ropes, facing extinction.

A tsunami of disruptive factors bedeviled the enterprises before they remade themselves. Some of the difficulties pertained to the overall economy or their particlular industry. Not a few of the problems were of their own making. Each company was hanging on to the past, hoping somehow to get back to what had been their best era. But the returns kept diminishing. Finally, they understood that there was no other choice. It was either change or go out of business. Why did they wait until they were near bankruptcy?

Collins and his researchers identified what they called the T, or transition point when each company’s performance began to noticeably improve. The T for all of them fell in the period from 1966 to 1980–the last bear market. This is telling. People do not fix the roof until it’s falling on their heads.

Bull markets and favorable economic times are breeding grounds  for mediocre perf0rmance, engendering complacency and the delusion that a business is in good shape. Long bull markets like the twenty year rise that ended in 2000 have a corrosive effect on institutions of all types. Companies, small and large, governmental bodies, colleges and universities, even charitable organizations are prone to a buildup in bureaucratic fiefdoms, sloppy decision making, excesses in operating expenses, excessive compensation for senior executives (without comparably strong performance), and, often, excess operating capacity due to overconfidence.

Bear markets and the depressions that go along with them serve to wring the excesses out of the system. Thousands of companies in the US today are hanging on to the unrealistic hope that things will get back to the way they used to be. They won’t, of course. Game over. Change or get blown off the court. Bear markets are for winnowing out the weak and forcing good change on companies with potential. The next few years should be bear market years,  bringing about those changes, creating outstanding opportunities for investors when a bottom in the market is at hand.

Observations

The shame is that most people who still own stock–specifically, the majority of folks with 401k accounts–are also hanging on, hoping that things will get back to the way they used to be.  It is a cruel trick that their advisors aid and abet them by promoting this hoax. Eventually, the pain will become intolerable and investors will give up and sell. When they do, it will feel as though they have taken a giant purgative. Hence the title of this essay. The wiser man remains in cash.

Cheers,

Rod

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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