Can you learn to love volatility?
Feb 05, 2013
An article in the Wall Street Journal a couple months ago bore the title "Learning to Love Volatility." In the ag industry, can we learn to love volatility?
I hope you answer yes, because in today’s world I believe the ultimate path to business success means managing price risk and finding a way to embrace volatility. My premise is you can either be a victim or a victor in the marketplace.
If you choose to say, "Poor me," volatility can kick your butt. Or, you can step up to the plate, harness the energy – and opportunity – from a volatile market and put it to good use.
The author of the Wall Street Journal article touting a love for volatility was Nassim Nicholas Taleb, who is a professor of risk engineering at New York University’s Polytechnic Institute. Taleb is also credited with developing the "black swan" theory a decade ago as a means to refer to large events that are unexpected, but profoundly shape our world. World War I, 9/11, the dot com crash would be examples.
Building on his black swan research, Taleb’s newest theory is that we must learn to benefit from variability, stress and disorder. In his Wall Street Journal essay, Taleb writes, "We should try to create institutions that won’t fall apart when we encounter black swans – or that might even gain from these unexpected events."
Taleb outlines this concept in his newest book titled Antifragile: Things That Gain From Disorder. I don’t’ know if "antifragile" will become as commonplace of a term as black swans – and portions of Taleb’s book are challenging to grasp – but I do fully support the theory that with the right tools and preparation businesses can benefit from disorder – or stress – in the marketplace.
Stress Can Be Good
I think all of us can admit that sometimes stress can be beneficial. For instance, an impending deadline on a project usually provides the right amount of stress to prompt you to complete the project.
As another example, to get the full benefit from an exercise workout you need to push yourself – exercise a little harder to create stress that will strengthen your muscles and cardiovascular system. If you go to the gym and always lift 2 lb. weights for 10 minutes, eventually your body won’t gain from that. But what if you hire a fitness coach, learn to use new tools, and push yourself to a higher level of fitness?
Taleb proposes, and I agree, that growth can come from stressful experiences.
That said, you need to prepare your business to do so. In my opinion, that means you either need to become an expert on volatility, or you need to align yourself with professionals who can assist your business in using risk management tools that are impactful.
Using the fitness analogy again, if you lift weights and you do it wrong or without proper training you can hurt yourself. The same is true of marketing. If you do it without proper knowledge or using the wrong tools, you can hurt your business.
Likewise, you want to consult with a marketing professional who is going to push you a little. You don’t want to hire someone to do things the same way you’ve always done them. You’ve got to be pushed outside your comfort zone to become better.
Ready For The Next Black Swan?
Although black swans are unpredictable, we do know they’re coming. For instance, I can predict that a massive earthquake will eventually occur in California and that the volcanoes in Yellowstone National Park will erupt at some point – the Discovery Channel frequently features programs about these future natural disasters. Thousands of black swan scenarios exist.
What we don’t know is when a black swan will occur. However, in our global, quickly changing, interconnected economy, I hope you’ll recognize that black swans are not rare, once in a lifetime events. Black swans happen frequently; once in a decade or even every five years.
I’m 54 years old. In the next 20-25 years of my life, I could witness three to six more catastrophic world events. How many significant boom-boom-and-bust cycles will you experience in your lifetime? How many more droughts? How many more economic collapses?
I don’t believe that any of us should sit back, wait and see what those events are and then react to them. Rather, as Taleb suggests, I believe we should plan and prepare our business strategies now so that we might gain from these unexpected events. Be antifragile!
Input costs are high, and price swings are many multiples of what they used to be. That’s why I believe you’ve got to maximize every price opportunity and benefit from each major price swing using risk management tools. With a consistent, strategic and disciplined approach to marketing, you can capitalize on the opportunities that come from volatility and position your business to gain ground and move ahead.
Can you love volatility? In these volatile times, you can’t cower from it and do nothing. As Taleb suggests, embracing volatility is key, and with proactive market planning we can learn to gain from disorder.
Scott Stewart is CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at firstname.lastname@example.org
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