Cause for optimism

There has been an abundance of pessimism lately; some might say a surfeit. An insightful article in the 9/19/09 Wall Street journal (“From Bear to Bull,” James Grant) argues that the coming recovery will arrive much sooner and be much more robust than the current economic consensus.

Grant does not claim to be prescient, but based on data from the past 120 years, observes that the deeper the down cycle, the quicker and steeper the recovery. He also notes that there are many variables at work, none the least from government intrusion, so the precise timing and form of the recovery cannot be known. Then how best to position and prepare for the upturn? Grant quotes Henry Singleton, former CEO of Teledyne: “…we’re subjected to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.”

Having a well defined, thoroughly understood set of goals and objectives is the critical success factor, be it for individual investors or corporations. When opportunities instantaneously arise which are congruent with your objectives, you must immediately embrace them. For the corporation, that means empowering the members of the organization to do so, from engineering to accounting to sales.

All this is reminiscent of Maneuver Warfare, wildly successful and deeply embraced by the United States Marine Corps. Maneuver warfare posits that in the chaotic ebb and flow of battle, you must recognize opportunities and capitalize on them more quickly than the enemy. To outthink them is much more important than to outgun them. One way to understand this is in terms of USAF Colonel John Boyd who proposed the OODA loop – Observe, Orient, Decide, Act.. The OODA loop determines the time it takes an individual or entity to respond to an event, and to the quicker goes the spoils.

One consequence of this is that rigid bureaucratic organizations tend to be much slower in processing OODA loops than organizations having distributed intelligence and authority. Hence the Marine Corps concept of the “Strategic Corporal,” in which a fire team or squad leader, cognizant of his commanders' intent, can instantaneously exploit openings or weaknesses displayed by the enemy, and do so in support of the command's objectives.

For corporations, this implies that smaller, more agile firms with empowered employees stand to be more successful in the coming chaotic recovery. Large, ponderous firms, or worse, government entities, are almost guaranteed to lag behind. For individual investors, it will pay to search out those agile firms.