Monday, August 24, 2009

Krugman vs Ferguson

I was reading about the "Great Debate" between Nobel prize winner Paul Krugman, and Harvard Professor Nial Ferguson about the how the future looks and what the right course of action is for governments in order to secure a stable economic future for the world. This is just one example, I could of course have picked, Buffet, Soros, Rubini, Bill Gross and many others to describe the debate.

Those of you who know me, know well enough that I am no economist - indeed I have very little academic claim to fame. It will be no surprise to you to discover that I am not going to weigh in on this particular debate.

Then why, you my ask, I am writing about this at all!

The answer is simple.

At Goldrock we are in the business of backing management teams to execute on their growth plans. Management in a era of uncertainty is certainly more challenging than in "normal" times.

During my short military career as a humble tank driver in the Israeli army we were taught a very important lesson in risk management. Loosely translated "when you are in doubt, then have no doubt."

This is broadly helpful when only risk is to be considered as it will keep you away from making some risky blunders, neutralizing the uncertainty, which is such an important element in risk.

However, this is not so helpful when managers and entrepreneurs are being asked to make decisions in the current uncertain environment that could have a long-term affect on their future growth prospects, which is, after all, why they are in business.

My take, for what its worth: Whilst Krugman and Ferguson are so far apart in their analysis and economic conclusions, it is probably too early to simply ignore the risk which still abounds in markets around the world, and that risk management will be a tool whose importance will be over-weighted for some time to come.

We have seen some improvement in the trading environments for our portfolio companies, but I think that the reality of this is not as rosy as the reaction of the world's stock markets.

As a result we ask managers out there to have a little more patience. We have seen some of the fog that has shrouded growth prospects lift in recent months, but we think only far enough as to see a few paces ahead. We will need some more robust indicators of economic improvement before feeling confident about the return of serious growth prospects to the economies of the world.

As a manager of money, rather than a manager of businesses I have the luxury to be able to sit on the sidelines for a while, and whilst we have seen the investing environment improve, we still retain a cautious stance.

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