"After finishing The Black Swan, I realized that there was a cancer"

From my post on the AMEX OPEN Forum, Sept 21/09

The anniversary of the Lehman Brothers melt-down has given pundits and newspaper business sections lots to write about.

One person whose opinion is courted is Nassim Taleb, author of The Black Swan: The Impact of the Highly Improbable. (Random House)

You’ve probably read the book and recall the story that spawned the title: all swans were once believed to be white – until black swans turned up in Australia.

Taleb makes the point that we are make decisions only on what we know, and we are vulnerable to unexpected events. And that the credit crunch was absolutely not one of them.

In a recent interview, he said “After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.”

If Taleb is correct and we are still vulnerable, what should we be doing in the small business world to insulate ourselves?

Well, let’s look at diversification. For years, marketing experts have told small business owners to focus on one core offering. This was because most small business owners do not enough sufficient capital - or time – to invest in more than one primary product or service. But in a new economy characterized by the threat of another meltdown, maybe we should be looking at Plan B.

As Taleb says, “A Wall Street trader who's also a belly dancer will do a lot better than a trader who winds up driving a taxi.”

Plan A should be a focused investment in a relatively low-risk business. This means sticking with a profitable concern where you have the experience to succeed, low debt and good cash flow from loyal customers.

Plan B can be looking for what Taleb calls “a good Black Swan”, an unpredictable success. Technical innovation is one route. It goes without saying that this is a risky business, and therefore warrants a much lower investment in money and time than Plan A. 80 percent focus-as-usual and 20 percent on Black Swan hunting seems about right.