Market Irrationality, Solvability, and Efficiency

This article inspired by the words of John Maynard Keynes that reads "markets can remain irrational a lot longer than you and I can remain solvent." We can define the term "solvent" as a person's ability to pay off his debts. Therefore, we can apply this quote in various cases and are also suitable for those of you who are starting your new business. Next, I will try to explore the wisdom of Keynes's quote above.

By: ShenXin | Pixabay

Market Irrationality

After I conduct various studies on the stock market, commodity markets, and cryptocurrency markets, I concluded that markets were often irrational. For example, the price of stocks that were clearly overvalued continues to rise, while undervalued stocks continue to stagnate, or even falling miserably. I also observed many products that were superior in terms of quality could not defeat competitors' products that were inferior. These things actually did not make sense when we rationally analyze it.

Based on the cases above, I can say that the market is indeed irrational. Thus, it is a big mistake if you make an analysis using the assumption of a rational nature of the market. The market is unpredictable plus no one could predict the market. You should not underestimate this uncertainty factor. Therefore, you should make a projection that incorporates uncertainty into your calculations so that you can still pay off the debt (or not run out of capital) before the market can return to its rational state.

Solvability

One of the key success factors for starting your new business operation is being able to remain solvent (i.e., still able to pay your debt installments). For that reason, you must take into account working capital (operational costs) carefully. Remember that the market will be irrational, so the goods and services you offer may get low sales even though it has been through extensive market research. Is your research wrong? Certainly not! The market is just strange sometimes.

Calculate the uncertainty factor into the financial projection in your business plan. Then, if you have predicted that your profits (from operational activities) can pay all your expenses after your business runs for 1 year, extend it to 1.5 years. If you expect to break even after 2 years, make it 3 years, etc. Remember that no business fails when the financial statement is better than the financial projection. However, if you made a mistake in budgeting, you will be prone to bankruptcy because you will run out of capital or because you cannot pay the debt installments.

Efficiency

When the market behaves irrational, it is very important for your business to operate as efficiently as possible. Indeed "money solves everything" which means that all your business problems can be solved with high sales revenue, but of course, it is difficult to sell your "killer product" on an irrational market. Therefore, you must tighten your belt while waiting for the direction of the wind to change, until the market turns rational again.

Efficiency does not mean you then spend time (and resources) to overthink (plan excessively) about the company's expenditure, but you should focus on the items that have a big impact. For example, if 50% of your business operating expenses are on employee salaries, then you should cut employees. Remember that you will be far better off focusing on strategies to increase sales, rather than focusing on efficiency (reducing cost). Sometimes, you could also educate the market if you have enough resources for it.

Finally, we have learned that superior products do not necessarily produce high sales when the market is irrational. So, it is very important to keep the company's financial condition to remain solvent by creating conservative financial projections and operates efficiently when this happens. By the way, you can also try using the five box positioning model to educate/rationalize the market.

Translated from: Kubisnis Indonesia