When “the next big thing” is identified—whether it is tulip bulbs, internet technologies, real estate or financial derivatives, market mania is not far behind. And while riding and making a mint from a bubble of “irrational exuberance” is possible, it’s also beneficial to know when to exit the moving train before it explodes. Just ask the former executives of Lehman Brothers.
It’s been said the phrase, “this time is different” is one of the most dangerous sentences in business. That’s because executives keep making the same mistakes again and again say economists Carmen Reinhart and Kenneth Rogoff; “We gullible humans (believe) that the laws of financial physics have been repealed for us.”
Why do humans keep making the same mistakes? Perhaps it’s because over optimism—and resulting speculation—is very much a part of the human psyche. We like to believe those who have previously failed just didn’t have the right information, or that a new paradigm has emerged. And sometimes changes are so fundamental and drastic that they do create new markets. But more often than not, we’ve exchanged our money, time and hope for worthless swamp land.
Now what does any of this have to do with marketing?
An important role for marketing executives is to provide direction to our business leaders regarding trends, white space, and best areas in which to compete or avoid. We do this via a thorough understanding of competitive, social, governmental, and economic forces within a market.
In adding a potential new product or service to our portfolios, we need to ask ourselves, is this market sustainable —or does it depend on unstable factors? How long will this market exist? At what stage of the lifecycle is the market? Does my company have the capabilities to compete? Can my company make a profitable impact?
And this is where diagnosis of a market bubble comes into place.
Now let’s be clear. Not everyone believes in economic market bubbles. Some economists are convinced that people have all the information they need and therefore always make rational decisions. Efficient and rational market theorists from the Chicago School of Business, in particular Eugene Fama, don’t believe in unstable and wild market inflations. “I don’t know what a bubble means,” Fama recently declared to writer John Cassidy.
However, since there’s an abundance of evidence for market euphoria, let’s assume economic bubbles do in fact exist. The next step is identifying whether the market in which you plan to participate is in fact prone to speculative behavior (even mania), and if so, should your company compete or walk away from the opportunity?
These are a few questions that could have been asked by senior management at Lehman Brothers as they jumped headfirst into frenzied markets.
In the book, “A Colossal Failure of Common Sense; the Inside Story of the Collapse of Lehman Brothers,” former Lehman Brothers vice president, Larry McDonald cites how then CEO Dick Fuld and his second in command Joe Gregory made bet after bet, first in derivatives such as collateralized debt obligations (CDOs) and credit default swaps (CDS) and then grandiose real estate purchases.
These purchases—with borrowed money—were made with the following inherent assumptions:
- the market would keep rising indefinitely,
- there would always be a market for securitized debt, and
- what’s profitable for competitors must also be the same for Lehman Brothers.
Sadly, we know how the story ends. McDonald relates, “When a high rolling market goes wrong, history tells us that it happens with lightning speed, as everyone stampedes for the door at the same time.”
Indeed, as the market for derivatives self destructed, Lehman was stuck with a bag full of product than nobody wanted, to the tune of sixty billion dollars. Senior management failed to ask themselves, “how long can this market sustain itself?” or even “what’s our current position and what happens if this bubble pops?”
It seems that it’s quite easy to get caught up in the euphoria of a new market, especially when everyone appears to be making boatloads of money. An ebullient market looks like it will never end.
However, it’s very possible to enter at the very top of the market and not know it, effectively joining the party just as the host removes the punchbowl. And this is where very careful analysis from the marketing function can come into play.
While a frothy market may be pretty easy to identify, it’s difficult to know when it’s going to end. Participating in a market bubble is a risky proposition and timing (getting in and out) is everything. And for those analytical types, even if deep market analysis is performed, it’s possible your timing may be off by just a bit, leaving you short or long. After all, as John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.”
One thing is for certain, history repeats, or as others have said, it rhymes. Lehman Brothers stood for 158 years but participation in one of the largest asset bubbles in history brought this noteworthy firm to the steps of bankruptcy court. Lehman rode the bubble and didn’t “get out”. The musical chairs stopped with nary a seat.
It really wasn’t different this time.
Marketers, do bubbles exist? Is it possible to discern a bubble? How can one discern when to “get out” of a frothy market before it implodes?