Like many other people I have some investments in shares. Recently I happened to come across a book by Daryl Guppy, he argues that investing in the stock market does not work as a small investor, you really have no way of knowing what you are really investing in. For this reason you need to keep close control of any shares that turn out to be not what you expect and have a stop loss strategy. I couldn’t help but notice the similarities in management of a business.
As employers we invest in people rather than shares.
To me the stock market makes little sense, I see a major company release a really good result, and….. Their share price plummets, it defies logic. Regardless I research carefully and choose a company with strong financials that pays a good dividend (My choice was BCI)
For many employers people as employees make little sense, their behavior often is contrary to what you expect. So you carefully choose through interview and references. Lets say you choose Frank
Within days BCI’s price drops , I hang on I know it’s a quality company, the price continues to drop, I see the stock is now much cheaper, so I buy more.
The Frank doesn’t seem to be able to do the job, he explains he is settling in and points out some external issues that are causing difficulties, you know he has potential so you invest a lot of time getting him up to speed with your business.
Then I hear that revised figures have been released, its not so rosy after all, management is still optimistic though as the iron ore market is expected to recover, I buy in some more share at the cheaper price on the positive outlook.
It turns out frank has a lot less experience than he led you to believe, in fact you ask him to do something and he just doesn’t know how to do it! Now much of your time is invested in keeping him on track. Other staff are effected and their performance is dropping as well. You hang on in the hope that your investment in him pays off.
The mining boom is over, my investment has made a 93% loss, Too late all has been lost, I hang on in the grim hope it will come good.
Then one day a medical certificate is dropped on your desk, “I’ve hurt my back” Your investment in Frank has just hit rock bottom. The loss is now total and there is no choice but to work through the process.
Occasionally the price of BCI lifts a little to give me a bit of hope and then falls back.
Frank comes into work after months off, and is good for a few weeks, then his back problems reappear.
Daryl Guppy’s argument is that its not about what you invest in, its about the management of the risk associated with that investment. It is essential to have stop loss situation decided before you invest, and determining this is more important than the selection of the investment, as no one really has a crystal ball, the best we can do is do our homework and monitor closely. If the price is heading south, don’t hang on and hope things will change, accept that everyone else knows something you don’t, and get out at the stop loss! Taking no action is risky.
In the same way business invests in people, and we need to manage that investment and its risk. This is a plan to nurture and support the individual, and behind this we need to have a stop loss, in business this is the 3 months trial period.
A business owner takes on someone with the intention of a long term employment relationship with them. Unfortunately there is no way of knowing how that investment in the promising new employee will work out. Sometimes they are perfect, some times its just break even, and, sadly sometimes the best skill that this person has is the ability to talk themselves into a job. Implement the stop loss and accept the mistake early, giving someone else a chance at the job.
Taking no action is the riskiest approach.
Stop Loss = Stop the pain NOW.
Share Trader Daryl Guppy talks of the importance of cutting your losses—selling the shares before they loose too much value. I knew this anyway, but it hasn’t stopped me from holding onto stocks and watching them fall in value, and the more the fell, the more I had lost and the more I wanted to hold on to them until they recovered. Telstra never did make it back to $9.00.
In a business the stop loss is just as critical, have in mind the point at which you say, “this is going in the wrong direction, time to stop the pain and try something/someone else. Hanging on and hoping the situation will improve will make you poor in business just as surely as it will in the stock market. A stop loss is not about pulling out when the pain gets too much, its about pulling out before the pain turns into damage.
If what I am saying makes sense, and you are not sure how to put it to action please call me on 0407 335 or email firstname.lastname@example.org for a free no obligation discussion.
In a nutshell: make the hard decisions early before they become harder decisions.