Bubbles Always Burst

The problem with bubbles is that they burst. There have been many notable bubbles throughout economic history, but let's only go back as far as the Internet bubble. If you recall at the time, Greenspan called it "irrational exerberance." I remember attending a venture capital conference at the Waldorf Astoria Hotel in New York City in October of 1999. That was probably the apex of the frenzy. I sat through numerous presentations by would-be entrepreneurs talking about some of the most insane ideas I'd ever heard. Not insane as in "wow, that's really a paradigm shifting break-through" - insane as in "there's no way this will ever generate a nickel of income much less profit."

In every market, there are people who push the envelope and help push us forward. But those were the minority during that time. The majority really were those who were playing in the realms of the imaginary. There was no intrinsic value being added in most of these bubbly ideas, which is part of why the bubble burst. Still, out of that time, we got a lot of new technology and a lot of innovative new uses for the Internet - so it wasn't all smoke and mirrors. But the businesses that added no real value and were all about moving money from the VC wallets to the entrepreneur's wallets - those all crashed and burned.

Fast forward to the real estate bubble of the past few years. What was happening? Look at television back then to see the surge in shows related to "flipping" real estate. People buying a house, putting a bit of cosmetics on it and re-selling it far above its value. Once again, not adding real value but looking to move money from buyers wallets to "flippers" wallets - many of whom crashed and burned when the market went south.

The third and final example for today, the sub-prime mess. So here we had a bunch of mortgage brokers getting squeezed out of the conventional lending market by the unmanaged growth of Freddie Mac and Fannie Mae, so they get creative. Hey, that was all legal in the wildly deregulated environment that had been created for them to play in. So they came up with all kinds of crazy financial vehicles - for home borrowers and for financial institutions. The problem? If you've been paying attention, you'll know the answer once again is that there was no intrinsic value in this mix and that it was all imaginary money once again moving from one wallet to another. While some call it a 'market correction', it's almost like a 'value correction' in that we need to look at where real value lies and what builds lasting value rather than effervescent bubbles.

The shake out always hurts - like the con man on the subway with the shell game - you walk away without that $5 bill you placed as your bet, shaking your head because you KNEW in advance you were being conned and yet you just couldn't resist. The economic shake out from this shell game will take time to unravel and to right itself.

What's the lesson for an entrepreneur? We can become so enamored of the potential payoff that we lose sight of building real, lasting value along the way. If it sounds too good to be true, it probably is. If it feels like a con, it probably is. If you can't point to the value proposition, step back and rethink it.

Work to create real value and to create a real exchange in order to build a lasting business. Anything else will be just a bubble that will invitably burst.

Run From The Crowds

A contrarian investing strategy is one in which you invest in the opposite manner as the rest of the market. If everyone's buying, you're selling. If everyone's selling, you're buying. The most recent, high profile contrarian move was when Warren Buffett announced a couple of weeks ago that he was buying US stocks at a time when the US stock markets were plummeting. Buffett looks for value in a company and invests accordingly. So, when he saw good companies trampled by the vagaries of stock market emotions, he decided there were some good deals to be had. That does not mean, however, that Buffett was investing across the broad markets.

A good contrarian strategy doesn't mean that just because everyone is selling you should be indiscriminately buying. If you look at what Buffett did purchase during that time, he got a preferred position that put his investment in the proverbial catbird's seat. He saw an opening and made his move.

How does this help you as a would-be entrepreneur? The greatest value is not in running with the crowds but in separating yourself from the crowds. There is often an opportunity when everyone is running one direction for you to slip in unnoticed and gain some traction in a less popular area somewhere else.

That doesn't mean that every contrarian move makes sense or that you will always find success running from the crowds. But in this economic environment, there's more opportunity than you might think. The key is to think differently than others and scour the economic landscape for your opening.

Starting Up During An Economic Meltdown - Crazy or Creative?

Starting up a business is tough in the best of times - but starting up a business now? What are you nuts? That's probably what your family and friends are asking you as you contemplate taking the plunge into your entrepreneurial truth.

So, first step - get real. Real about what it will take to successfully start a business.
Second step - get help. ..business help. You know a lot about something or you wouldn't be thinking of starting your own business. The question is - what else do you need to know before you jump in?

In the days to come, we'll look at some of the factors to consider when looking at starting up your own business - and you might be surprised to hear opportunity might be knocking on your door.