John H. Patterson was ahead of his time. He’s the reason why a lot of business practices exist today. In 1884, he took control of what became the National Cash Register Company and the business world would never be the same.
But before that ever happened Patterson read a book that taught him an important lesson. Benner’s Prophecies of Future Ups and Downs in Prices is exactly like it sounds.
Samuel Benner wrote the first edition in 1875, followed by 15 more editions, each one updated with new predictions on the market. He played the role of market fortune teller well.
If you look past the prophecies, Benner pushed the idea that business and prices move in cycles. It’s obvious today, but it was a new idea at the time. Which is exactly what Patterson learned:
What he got out of the book was, first, that something in the nature of a business cycle existed, and second, that one should be weary of the depression which follows prosperity…
He would always hold a meeting long before any one else thought that a panic was conceivable. he would explain that there was going to be a panic. He would make a big “V” on the blackboard or pad and say something like this:
“Here we have a valley of depression. Business is going to drop right down to the bottom and then come up the side. We can drop the business or we can build a bridge and go across. Let’s build a bridge.”
His way of building a bridge was to intensify every sales effort. He did not draw in for a panic. He put on extra effort, and each panic marked a substantial advance by the NCR…
For while many get out of this sort of study only a reason for hiding in the cellar and being chary of coming out of it, Mr. Patterson took an approaching panic as an instruction to revise his business methods and to press business the more furiously.
Patterson didn’t care about the accuracy of Benner’s predictions. He saw an opportunity in the peaks and troughs of the business cycle. Patterson, also, had a few things going for him that worked in his favor: he owned the company outright, he avoided too much debt, and profits weren’t his top priority (he was a cash flow guy). It was growth.
So instead of loading up on debt and squeezing every ounce of profit out of the peak of the cycle, Patterson quietly prepared for a downturn in business. When the recession finally came, as it always did, he did something his competitors were less willing to do.
He spent more money while his competitors cut costs to maintain a profit. He improved his product. He ramped up advertising. An Increase in sales soon followed.
In other words, he reinvested every penny back into his business while the competition pinched every penny they could. Then the company took market share and grew. With each downturn, NCR pulled further away from the competition.
Of course, since business and investing are one and the same, Patterson’s lesson carries over for investors.
First, keep an eye out for businesses with management that quietly prepare for the next downturn in the cycle. Those with a plan have a better chance of being ahead of the curve, and the competition, on the upswing. Or you can flip it — simply avoid businesses with a history of never preparing for the next downturn.
Second, you benefit by following a similar plan with your portfolio. It requires a combination of a strong financial foundation (savings) and investment plan that prepares for the next downturn during the prosperous times, to survive and seize the opportunities during the downturns. It might seem counterintuitive, but it leads to success in investing.
This post was originally published on June 12, 2020.
Source:
John H. Patterson: Pioneer in Industrial Welfare
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