Worst Case Scenarios

The best CEOs in the world – whether they run multinational corporations or small, growing businesses – are those who possess, among other traits, the ability to understand what the ‘worst case scenarios’ could be for their businesses and they keep a keen eye over those risks and exposures.  Like a hawk watching over its prey, they’ll swoop in with lightning speed and remove the threat preemptively. 

Sounds like paranoia?  Sure, but that is what it takes to successfully run a company and prevent the business from being overtaken by the competition and the ever-changing business landscape.  In almost every analysis of failed or failing businesses, the result will inevitably show that the managers and executives had taken their eyes off the risks. 

Everyday, businesses (and investors) take risk and they expect to be rewarded for doing so.  Risks are a normal part of business – whether it is in the form of new investments (assets, manufacturing plants and equipment) or inventory (stocking up ahead of the holiday season) or in granting credit (facilitating customer purchases), there are risks.  However, service and product pricing can only assume that there will be certain reasonable risks – otherwise, few people will be able to afford to buy the service or product.   The impact of a ‘worst case scenario’ (and varying degrees of that) must therefore be evaluated and avoided (where possible) or hedged against where the likelihood of it occurring is more probable than not.

Consider the car-manufacturing business.  For decades, fuel costs were low (some might even remember when a gallon of gas cost less than a bottle of Coke) and manufacturers had no worries about what could happen to their business model if the cost of gas doubled or tripled.  Despite the Clean Air Act of 1963 and the public’s support of the electric car, manufacturers that had leased fully working production models to the public removed them from the market.  They could not and would not imagine that the ‘worst case scenario’ would happen – that gas prices could go so high so quickly. 

When gas prices in the US started its fast track upwards and broke the $4 per gallon mark in the summer of 2008, gas guzzling SUVs and fancy big cars weren’t selling anymore and a paradigm shift occurred.  Hybrids cars went from being a fashion item to being a necessity and the return of the electric car became inevitable, sending those same auto-manufacturers scrambling back to their drawing board to come up with a product. 

Just as suddenly, automakers were faced with a credit crunch (thanks to the near collapse of the financial markets due to property speculation, sub-prime mortgages and collateralized debt obligations) at a time where declining sales resulted in a burgeoning inventory of unsold units on the dealers lots all around the country.  To make the whole thing worse, an increasing burden of pension obligations began to appear on their books (thanks to new financial reporting regulations) and forced those that were ill prepared or undercapitalized to file for bankruptcy protection.  The ‘worst case scenarios’ that they did not or would not permit themselves to worry about became a reality.  Lesson learned: one can only put off dealing with problems for so long - they will not go away and the consequences can and will likely become increasingly severe the longer we hold out.

The age-old adage “don’t put all your eggs in one basked” pretty much sums up what business need to be doing to stay ahead of the ‘worst case scenario’.   If and when the ‘worst case scenario’ happens, the business must not be found wanting.

Even in our personal lives, we need to always have an ‘exit strategy’ – just so that if ever the ‘worst case scenario’ happens, we know where we’ll end up and we have a ‘Plan-B’ that we can put into action. 

In learning how to ski, what stuck with me the most was the instruction I received on how to fall without incurring avoidable injuries and how to slow the fall or the slide down a slope and to get up and get going again. 

Parents have a tendency to be overly protective of their children.  Instead of teaching them how to anticipate problems and to cope in the event that bad and undesirable events took place, many parents do everything they can to put their child into ‘safe’ spaces so that their young would never have to deal with the disappointments in life.  In reality, they are only trying to spare themselves of the heartache and pain of ever seeing their own flesh and blood in a bad spot. 

My parents did not have the means or luxury of weaving protective cocoons around their children so they taught us the best way to cope, to fill our bellies when the rice jar was running low, to spice up the curry when there’s little to go with the rice on the table.  Although illiterate themselves, they taught us to study hard so we could have a better life than they did.  We learned what the ‘worst case scenarios’ could be and we learned enough to steer clear from them. 

When you have only one egg in the basket, you’ll quickly learn never to let the basket fall.  And if it should fall, you have done everything you could to keep the floor clean so you can still make a meal out of the broken egg.

The Economy is Bad – So Beware!!

Yes, we already know the economy is in a poor shape – we hear or read about jobs lost or shops and factories closing with a frightening frequency. Based on what is counted alone, unemployment has reached 8.1 percent in February 2009 and the trend is not encouraging. A total of 12.5 million people are unemployed, an increase of 5.0 million in the last twelve months alone (source: US Dept of Labor - http://www.bls.gov/news.release/empsit.nr0.htm).

We are so inundated by the endless streams of bad news that some among us would like to tune it out altogether, especially if it has not impacted us in a direct way. We’d go crazy with fear if we gave in to the media’s relentless drive to get the same bad news across every day. We cling on to every bit of good news we can, hopeful that things will eventually turn around.

The point of this note is not to give you more bad news on the economy. It is to warn you and to have you warn those around you of the many scams that are proliferating via email. Recently, I’ve come across an incident where the scam artists even used regular mail to send out a very genuine-looking-fake-check with a letter encouraging the intended victims to actually take it to their bank and deposit it. The clear giveaway, of course, was the condition that the victims not tell anyone about it before the whole transaction was complete. I would likely have brushed it off if I had not come across another incident where a retiree I know lost money to a different variation of the same con game.

The recession does not mean that the con artists, the scammers and the opportunists are going to give up and walk away. To the contrary, they are taking full advantage of the situation and putting their best game forward to milk the unwary. What is worse is that they are employing hooks that will pull in those who genuinely need help the most.

Think of it – when times are good, and you have a job, you are less likely to fall for the “work-at-home” schemes or “you’ve won a foreign lottery” claims.

When you are out of a job, an email or a flyer telling you that you can earn a few hundred dollars a week sitting in-front of your computer, you’ll be more than a tad tempted to take a look and see what it is all about. It is exactly what the con artists are relying on – your willingness to take a chance.

When you are no longer able to or when you no longer have work, you’ll understand what it means to be afraid – of living with no health insurance, of not having food on the table, of not being able to pay the rent, and, worst of all, of having to tell your loved ones of the very things you had never imagined you would have to say to them. In your desperation, you might just try anything and you’re a clear target for the con artists to prey on.

When banks were paying a fair interest on deposits and corporations were distributing dividends to their shareholders, the elderly could live off the income from their investments and not worry about eating into the capital they have set aside. Until the banks and corporations return to health, every elderly person is revisiting their retirement plans, funds, and income and scrimping to avoid that horrible possibility of being destitute before their days on earth are done. They are the easiest of victims and a gold mine for the con artists.

Take a few minutes and talk to siblings, your friends, your parent and your grandparents about such tricks now – it is your duty! If you care at all about their well-being and about their financial security, now is the time to do it. You may not be able to do anything about improving what they have set aside for their silver or golden years but you can, at the very least, do something to protect their nest-egg.

Remember, they may not be as well informed as you are about the treacherous tricks that exist today. The older generation grew up in an age where the tools to reach the masses with the same con schemes were not as readily available. Today, a 1-800 number can be routed to anywhere in the world to a genuinely sounding ‘account officer’ in a country where laws do not exist to put such con men away.

If ever there is a time for everyone to be more vigilant, it is now.