The Best Time to Diversify

The Best Time to Diversify

Professional, investing and business success in the natural resources realm are often well-served by adopting a contrarian philosophy. A contrarian takes a position opposite to that of the majority, or works against conventional wisdom. They zig when the majority zags.

But positioning yourself against the consensus opinion or prevalent trends requires a high degree of intestinal fortitude. Some will argue that our psychological well-being is rooted in social acceptance. Making a bold move against the group opens one to isolation and criticism. And you may also be fighting against your own personal fears or greed. And both are powerful motivators that make people act irrationally. But given that underlying markets and production dynamics in food, fuel and fibre are cyclical, sustainable success usually requires repositioning yourself in anticipation of the episodic ups and downs. Buying when everyone else says ‘sell’, or stepping back when the crowd is jumping in, can save you a great deal of emotional and financial pain when the market or production conditions inevitably change.

A contrarian philosophy is reflected in my belief that the best time to diversify is when you least think it is needed. But why shift from a great market, when revenues are up and growing? Moving to diversify away from a business that is performing well, not only reduces the risks of a market meltdown or production disruption (which perhaps also reflects cyclical weather, pest or other natural patterns), it is also often optimal from the perspective of having the resources to invest in researching and developing new ideas. When things are going well you will have the profits and cash-flow to invest in new ventures or service debt. If you wait until your primary market has already turned, you can be scrambling to find resources to keep your business afloat, let alone invest in something new. Wait until the market has bottomed before you move and you are largely reliant on outside help if any assistance comes at all.

And a contrarian view on diversification functions on many levels – be it for an individual, business, industry group or regional economy. If you are among the employed, it can be advantageous to start planning a career shift while your employer is enjoying success and may even be willing to pay for your professional diversification path, not after a recession forces your lay off. Industry groups often only get serious about diversifying at the bottom of their market cycles, when they should be making those moves before they hit a wall. For example, the North American lumber industry only looked seriously to Chinese markets after the US housing collapse. And most pulp producers are only now developing bioproducts and bioenergy options, after the paper markets have seriously, and some argue permanently, eroded. And governments and regional economies only seem to be engaged in large-scale diversification when their primary industries are faltering. This often comes at the cost of deficit financing for support programs when public treasuries are better positioned to help diversify the economy when the economy is booming and tax revenues are flowing in.

There are no guaranteed paths to success. And diversification also come with their own risks (Diversify Don’t Diworseify), but the best time to invest in products, services and markets is when you have the resources needed to commit to the process. And if you have no back up plans, the second best time is now.

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