The Tides of Life

Even though I am celebrating ignorance, I can still try to learn things. I was always amazed how in Scandinavia people built their homes right to the water’s edge. There is plenty of severe weather there, especially facing the Norwegian sea, so how could this be safe? And why was there so little tide?

Wikipedia helped a bit. I was a good read, but overall the conclusion is somehow that the tide varies because it does. I can understand how enclosed bodies of water like the Mediterranean or the Baltic have less tides than the oceans. But the other factors are a bit of a mystery, with the moon playing a role as well as something with the lovely name of bathymetry, which had me making mental models of splashing bath water.

Tides are just one of nature’s beautiful cycles. This is a twelve and a half hour cycle. There are of course daily cycles and monthly cycles. Annual cycles give us the wonder of seasons. It is often tempting for those of us who suffer winters to dream of perpetual summer, but the most common complaint of those who have moved is to miss seasons. I love the screensaver showing the daylight around the world, it is somehow peaceful and reminiscent of higher powers.

I can see why. Witnessing light in the sky after five last Sunday was compounded by a hint of a sunrise at eight on Tuesday, both signalling the slow return of daylight to our Northern clime, and giving a similar lift to my mood. Change signals renewal, and renewal is opportunity.

Most religions and beliefs make use of cycles. Most religions suggest a day for praying once per week and have an annual calendar. Whether superstition or not, the enduring practices are most likely the ones that work, that help people live their lives over many generations, so we should not discard them lightly. Feng Shui and the Aztecs are full of beliefs about long cycles. One day we might understand more about their value.

So, much of natural life follows the beautiful sine curve we witness in light each day and each year. Yet we tend to ignore the abundant messages for our business and personal lives. True, most things are complex and influenced by multiple sine curves of different height and length. But the old maxims that was goes up must come down, or what goes around comes around, are more true than we realise.

There was a lovely new item this week. Someone had found a connection between skyscrapers being built and economic crashes. For me it is a nice example of people’s folly over cycles. When are skyscrapers commissioned? When people believe good times will go on forever, when they make economic justifications on assumptions of extrapolating volume and margin trends. In the cycle, they are commissioned on the way up, opened at the top, and often seen as folly soon after as the cycle goes into reverse.

Not everything follows cycles, but it is smart in most cases to assume it, especially when something has an established history of cycles, such as national economies. Nigel Lawson and Gordon Brown both came to regret claims of abolishing economic cycles.

Look at the classic growth picture of a company, and you see a truncated cycle. Growth, slow then rapid then slow then negative. In theory a firm could go all the way to the bottom again before turning back to grow. In practice it gets taken over or goes bankrupt, so we rarely see the full sine curve in all its beauty. Cycles affect nearly everything – even Tesco today signalled it might be at the top of its long upward cycle.

The basic reason why cycles affect most things in economics is that there are usually countervailing forces. At the top, prices are too high and competition erodes margins. At the bottom there is spare capacity and opportunity for the smart. That is the root cause of many natural cycles too.

What is so lamentable is how bad most firms and governments are at spotting cycles. True, many sine curves overlap, and usually there are true trends (or cycles with longer frequencies) playing out alongside cyclical things. But we somehow miss the likelihood of cycles, despite ample evidence. And the result is empty skyscrapers.

An example helps to show why. At Shell I often had to analyse the plans of different countries, and recommend who should get extra capital and who should be cut back. I tried to fight it, but invariably the tendency was to shower riches on the successful and starve the failing. Usually that just meant silly skyscrapers and lazy management for those at the top of a cycle, and lost opportunities at the bottom. Most acquisitions were by overvalued firms of similar overvalued competitors, and divestments were of undervalued assets ready for a cyclical upturn. Smart investors, usually smaller, have taken advantage of this for years.

We did not always get it wrong. Once I was on a small project team trying to buy up tiny oil companies. We developed a little policy, which was to avoid companies with fountains in the yard, or similar monuments to vanity. You wouldn’t think this was much of a strategy, but it worked. And the reason is that the monuments tended to signal someone overreaching at the top of a cycle.

As a manager, there are simple things to do to help. First, try to differentiate between a trend and a cycle. Not easy, but history offers clues, as do analysis of real fundamentals such as Porters Five Forces and demographics. If in doubt, assume a cycle rather than a trend. Then, if you are on the cyclical upswing, tone down your investment assumptions, remember to harvest profits, and look hard at costs. In the downswing, do what you have to do to survive, make sure you have learned lessons and not making things worse, but look for cheap opportunities and signs of a cycle turn.

These same messages apply to all of us in our personal lives. How often do you have a day, or a month, or a year when everything seems to go right? Or wrong? Good news seems to come in waves, and so does bad. Maybe it is just random, but I believe there are natural cycles at work here too, even though you won’t get me signing up to astrology.

So what to do if things are going right? The same things. Don’t assume it will go on forever. Harvest, in the form of celebration and saving. And watch your behaviour – I am always at my nastiest and most intolerant when times are good.

And if things keep going wrong? Survive – stop what has to be stopped. Stop actions that make things worse – for example a bad diet or behaviour. But keep trying with the smart things, believing that the corner will be turned eventually. You’ll be surprised, it will. Keep planting, and some of those seeds will start bearing fruit. Maybe soon.

Of course, if you think things are going badly and nearly always have, you might have an expectation problem. Counting blessings is always a good thing.

So then, the beautiful cycles in nature may have other messages to help us. And the wisdom of elders and experience, whether in a religion or what seems just a superstition, might carry more value than we give it credit for.