The concept is very well understood in capital markets. Read all about it here.
You didn’t click the link, right? Go on, do it (the first 6 lines will suffice) – I’ll wait till then.
Now apply this same concept to businesses. You are running a business that makes wealth management software for advisor-driven investment situation. The market tanks 30%, 40% of wealth disappears on an average and 30% of a financial advisers (who are your main users) are laid off by their employers. In such a bloodbath your business shrinks just 10%. Standing ovation all around.
How will you do when the market turns back up? Is the reason for your stellar performance during the downturn because you really were not positioned correctly in the market? Before you take pride in your business being a great defensive bet, think of this. There are far less downturns in the market than upturns. Which one would you rather choose to benefit from?
Image courtesy: s3 images