“Go with the flow.”

Just like when the snow on the peak of a mountain melts and flows down to form a new stream, there is constant change in every kind of stream: streams of new customers, streams of income, and even streams of electric current. Of course, with any stream of water, the water levels will eventually both rise and fall. Old lakes can shrink as well as grow. Old currents can dry out for a while but then overflow, making a new branch of a river. Eventually, melting snow and flooding water can even carve a deep canyon out of rock.
Most people understand that canyons are not what makes a river. Rivers are what makes canyons, right?

But when we look at other kinds of streams, only a few people seem to understand that canyons only mark where water flowed in the past. With investing or marketing, would you rather use the most effective methods of the 1920s or the most effective methods of the 2020s?

So what exactly would I mean if I said that, even in investment markets, new water is more important than old canyons? Consider that canyons are like past prices. That is where the water used to flow.
Maybe I have five years of data for the past prices of a particular company’s stock (such as the huge insurance company AIG). How well does the price data from 2002-2007 predict 2008 (or 2018)?

The size of a canyon tells you about depth of water that has flowed in the past. But does it predict how much water is there right this instant (or will be there in 6 months or 6 decades)?

Canyon depth does not predict future water flow. Canyon depth only indicates past water flow.

Likewise, current market prices simply do not predict future prices. If “buying pressure” drops, then prices fall. If “selling pressure” pushes prices down and there is no “upward” buying pressure to match the “downward” selling pressure, then prices collapse. For instance, in April of 2005, the market price of silver fell over 40% in ONE DAY.

Was there a massive new deposit of silver discovered and then reported? No. All that happened was that buying pressure (the number of purchase orders) was smaller than selling pressure (the number of sell orders). So, prices fell. In that case, they fell quite sharply. In other words, there were a LOT more sell orders than buy orders.

Consider your local real estate market. What if 50% of the current homeowners all listed their homes for sale next week. Wouldn’t that lead to competition as the most motivated sellers competed to list their homes at a cheaper price than their neighbors? Or, what if there was an art auction where no one showed up to bid, but there was a long line of sellers who were all trying to dump their entire art collections?

The idea that price crashes are extremely unusual is very odd to me. When a grocery store puts an item on sale for 25% off, that is a temporary price crash. Exactly how unusual is that?

Have you ever seen an item in a grocery store that was marked “discontinued item – close out prices?” Or, maybe right after a holiday, some prices are dropped by 50% (or 80%) on holiday items.

Recent prices do not predict future prices (or not well). Sometimes the price change is very easy to predict (like after a holiday). Sometimes predicting a price change is slightly harder.

The idea that it is mysteriously hard to predict price changes is very odd to me (except when people are trying to distract from their lack of competence in regard to forecasting prices by discounting the idea that discounts can be easily predicted). To clarify, a discount refers to when a seller is willing to sell an item for a price that is lower than their recent asking price. If a seller can tell you what they are planning to discount soon (and why), then discounts are not just mysteriously random, right?

Prices rise and fall in trends. We can track trends in the prices that sellers ask (as in the listed prices). We can even predict future trends in prices (like by measuring trends in demand and trends in supply or inventory).
Oddly enough, many investors behave as if past prices are always reliable predictors of future prices. Those behaviors will reliably produce below average investment returns. In other words, the naive tend to be punished and the prudent tend to be rewarded.

In 2003 and 2004, I focused on two of the biggest issues that were emerging: the pending retirement of the baby boomers (especially in Europe and the US) plus a major change in global fuel markets that had begun in 1999. Not only did I use those two factors to predict the spike in fuel prices (which continued until 2008), but the secondary effect of that price spike: the collapse of housing prices and financial stocks (which was already starting by 2005).
As for the specific case of AIG, let’s quickly consider the canyon analogy just a bit more. They had been accumulating massive debts for years and, as their revenues declined, they became financially insolvent and they knew it. However, naive stock market speculators (including mutual fund managers and investors) were completely complacent in regard to the reality of the financial insolvency of AIG. Most investors did not know that AIG was in any trouble at all until AIG announced that they were filing bankruptcy.
Note that by filing bankruptcy, AIG was dramatically improving their finances by protecting themselves against their creditors (including the customers to whom they owed massive amounts of money). So, the bankruptcy filing dramatically improved AIG’s finances.

However, rather than spark a surge of buying, the bankruptcy filing had the opposite effect. The investing public had been so blind as to the financial reality of AIG that a selling frenzy began. People had simply presumed that AIG was solvent. The news that they were not solvent (and had not been for a long time) was a shock to the naive masses of speculators and gamblers who had invested directly in AIG stock or indirectly through mutual funds.
The naive had been looking only at the depth of the canyon without even thinking to check how much water was flowing through the canyon. Instead of recognizing the significant improvement to AIG finances that was produced by filing bankruptcy, most investors panicked. Further, most investors had never even considered the financial health of AIG. They had simply been looking at past price trends for stock shares of AIG. They were not even really investing in the business of AIG itself. They were just speculating (AKA gambling) on a possible continuation of prior trends of stock price appreciation.

Again, the naive tend to be punished and the prudent tend to be rewarded. Those who bought AIG when it was low and sold it when it was high were rewarded for their choices. Those who sold it for less than they bought it were punished for their choices.

 

 
Which is better for most businesses today: advertising in newspapers or marketing through search engines and social media? Even with some of the most expensive TV ads, like during the NFL Super Bowl, many of those companies are not just promoting a specific purchase, but driving traffic to their website, right?

The first computer that I used cost almost as much as a used car. Now, people can use the internet on a phone that they got for no cost when they signed up for their cell phone service. Plus, if they live in a city, they can go online through free wifi connections at local businesses.

When I first used a computer, there was no internet and modems did not even exist. In contrast, my grandkids will probably never even learn the word modem.
So what exactly could it mean that, even in marketing, new water is more important than old canyons? If I pick up a phone book from 20 years ago, I might find huge colorful ads from MCI or K-Mart or even from the same big financial institutions that were in distress by 2008. Lots of major airlines have also filed bankrupt in recent years: Delta, United, US Airways, and American Airlines.

Is it possible that their spending on TV ads and other ads could have been better spent? They could have focused more on marketing through the internet or even just lowered their prices rather than spend so much on big advertising budgets.
Some of the best marketing programs involve little or no out-of-pocket spending. In addition to updating webpages and providing facelifts to existing websites, I also promote select businesses for FREE. I create custom pages for them, get visibility on search engines, generate traffic to my pages, then forward to my participating businesses the exclusive inquiries (contact requests) that come from the custom web pages that I have made for their company. To clarify, it is more like a free trial, since the participating businesses agree in advance that once they are paid by one of the customers that come to them through my pages, then they owe me some agreed amount of compensation.

So the program costs them nothing. The only money they owe it is a fraction of the money that has already come to them through the program itself. I promote them for free (with no out of pocket cost to them), but once I provide them hot prospects and qualified leads, that part technically is not free. It just doesn’t involve any “investment risk” on their part. They simply entering in to a marketing partnership with me in which I risk some time in exchange for their promise of money AFTER my program has produced za new stream of cash flow for them.

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