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Trend chasing

Source: TW

Most of us in business are “trend following” in the sense that we implicitly project the immediate past forward. If we grew 30% for the past 2 years, we project 30% growth forward. We are usually right, except when we are not. Let us explore this.

Trends exhaust themselves. As an example, the movement of software to the cloud is a major trend and one day that trend will exhaust itself. That is when growth slows. Late entrants are the most vulnerable to trend exhaustion because they projected the growth trend forward.Over-clouding, sorry over-crowding 🤣 is the next big reason projections go bad. Too many people jump in to a sector believing that the growth trend will continue and even an otherwise healthy market gets over-crowded and that impacts company performance.

Beyond trend exhaustion and overcrowding, which are reasonably foreseeable, we have black swans - unforeseen risks that seemingly come of nowhere. The pandemic is an example. It decimated travel and tourism while accelerating cloud adoption (which became a trend by itself!).

Analyais

It is useful for any business to closely pay attention to its overall landscape. How many companies are entering or exiting a sector? Are they making money? What are our growth assumptions and how far do we think growth will be sustained?

Stress test with “What if” questions. I ask myself and our senior managers “If our revenue drops to zero, how long can we survive? What will be our recovery strategy?”

It is best to ask these questions during good times and analyze objectively. A prepared mind is a calm mind.