There’s a thought that we learn more during challenging times, than when things seem to be going well. We have found that to be the case. The last 90 days have been one of the finest laboratories we have had in some years to learn, to study what works, and what doesn’t, and how to respond well to change and uncertainty.
One of things we have observed is the power of positive habits. We could apply this to personal fitness, fiscal health, and relationships, or we could also look at the value of habit in business. Just now, let’s talk about personal fiscal health, and positive habits in business.
Personal Fiscal Health
If you have been a regular reader for more than just a few months, you have seen us recommend consistently setting funds aside for long-term wealth building. Our core recommendations are to a) set aside 10% of your cash flow for long-term investment, b) split these funds evenly between pre and post-tax investment choices, and c) automate the process.
One of our technology tools allows us to track investment performance by any time period and across any asset class, security, portfolio, or household. Out of personal interest, this is something that I look at almost daily, and certainly weekly. What have I learned so far this year? Those individuals who are consistently setting funds aside, month after month, have had investment performance which is significantly better than those who are not consistently setting funds aside.
The bear market which showed up in March, and the corresponding price recovery, has been especially short and deep, which has magnified the positive benefits of what is referred to as dollar-cost-averaging. Those who had automated their investment approach were usually putting funds to work at mid-month and at the end of the month, meaning the middle and end of March, April, May, and June. While funds they had put to work last year, and through February, saw a drop in value, those new dollars deployed in March and April were buying at exceptionally low prices, and were able to ride a quick recovery up.
While we have no idea what’s going to happen tomorrow, we have seen first hand the power of good habits on portfolios, when investors automate their decisions, and choose not to be governed by fear.
Habits in business? Let’s look at this from the perspective of people, process, infrastructure, and finance.
Have we developed the habit of continually investing in our people? Patrick Lencioni’s three questions are a) Are your people known? B) Do they know why their work matters? and c) Do they have a clear picture of the path to success? Internally, we have adopted a three-part approach to development. The first is personal development, which answers the question of who we are. The second is professional development, which answers the question of what we know. The third is business development, which answers the question of who we serve. What habits have you incorporated into your business life which will help create continuing success for those around you?
Well-developed systems and processes are critical for sustained business growth and success. The universe, and its Creator, is a system of systems, order, cycles, patterns, and process. Maintaining and improving systems and processes speaks to original design and intent, and the creativity which comes with that. However, experience suggests that continuous process improvement requires significant intent, as well as the deployment of time, energy, and money. Why? Because it flies in the face of the second law of thermodynamics, which is that the natural state of this world is from order to disorder. Well-developed processes though, executed consistently by engaged team members, seem to generate significant value for both clients and the business. What habits can you and I adopt, which will allow us to be intentional about process improvement, for the benefit of all those we serve?
Plant and equipment, real estate, furniture and fixtures, rolling stock, IT systems. Most often these assets are capitalized and amortized over their useful life. Our hope is that they will last forever. They don’t. What habits of review and evaluation will allow us to determine when to upgrade, when to adopt new technologies, all with an eye toward improving deliverables to all those we serve?
What habits do we embrace to assure solid financial results? Here’s what we have learned. Go easy on debt. Maintain a reserve. Have someone review every entry on every bank statement. Review profit and loss, balance sheet, and statement of cash flows at least monthly. Take the time to build an annual budget. Measure monthly and quarterly results against the budget, and against previous years. Measure the return on expense dollars deployed. If expenses are up this year over last year, is revenue up by a greater percentage? If not, what long-term investment are you making, so this will be the case? We could go on with these questions, as this is our area of expertise, but we will stop there. The key question is what habits you and I have installed, so that we remain aware of business finances.
The state of the world is chaos and confusion, as expressed in the second law of thermodynamics, which is the natural state is from order to disorder. Any meaningful success or quality of personal and business life flies in the face of this and requires significant intent. Our experience is that intent is best executed in the form of habit.
Until we see you again, wishing you well.