Being a senior Finance major I have had many great experiences working in the financial services industry as well as in the classroom. Throughout my experience I have noticed three common lessons my professors and managers have tried to bestow upon me. If you are interested in the business/investing world or a a recent freshman unsure of what you are getting into look no further.
Rule 1: There are no free lunches.
“There ain’t no such thing as a free lunch” is a classic phrase used in the business world but what does it actually mean? Another way to phrase this would be that time is money. There is a cost to everything in our world and it is something every business student should recognize and truly understand before delving deep into economic theory, supply chain management, finance, etc. Understanding and applying this rule to any business situation can help provide clarity on the purpose of say a meeting with a client or even the motivations behind why managers do the things they do. Recognizing the impacts of your decisions is key during negotiations as well as project planning. It is also very important to understand opportunity cost and how every choice you make has a next, best alternative that you could have chosen but didn’t. As a manger, taking an employee out to lunch has an obvious cost in terms of the bill. However, there is also an opportunity cost involved. The manager could have used his valuable time and money spent on the bill to take out a prospective client which could have generated more revenue. Always understand the costs you are incurring during any situation.
Tips for time/money management:
- Always evaluate the opportunity cost of a decision
- Understand the true net value of a situation
- Use this lesson to better understand the motivations behind a person’s actions
Rule 2: Don’t put all your eggs in one basket.
In the business/investing world, risk is one of the most important factors to take into account. Risk is the reason you can both make or lose significant amounts of money in our world and is the driver of our banking system. When investing in the stock market or any business venture you may ask how do you mitigate this risk? That is done by diversifying of course! Diversification is achieved through investing in different areas/sectors that will react differently to the same event. For example, if you are heavily invested in oil companies or gas future contracts and an event where the supply of oil goes way down it is going to have a large negative effect on your investment. If you other investments include something like an airline or automobile company that rely on oil then all your investments will fall. However, if you invested in say a solar energy company or even an auto manufacturer like Tesla who rely on alternative sources of energy they may see a rise in their prices due to their now increased necessity. This helps you to hedge against any extreme changes in your investing portfolio. This lesson is also applicable to other forms of investment, like in a companies infrastructure, projects, and talent.
Tips for diversification:
- In terms of stock trading, invest in different sectors/industries and look for negatively correlated stocks or stocks that move in inverse directions historically
- Never rely too heavily on one person in a company or allow them to harbor important information
- Never rely on one source of income and have a backup plan (i.e. retirement fund)
Rule 3: Don’t shoot from the hip
In classic business fashion, this rule can be described using an idiom. In order to ‘not shoot from the hip’ you must have not only a plan but an overall strategic goal clearly defined. No decisions should be made straight from the gut or in the spur of the moment. Unfortunately, plans are never executed exactly the way they were originally conceived. This means that some spur of the moment decisions/changes have to be made to the plan but with a clear strategic goal you can maintain your path.
Tips to avoid shooting from hip:
- Clearly define your overall strategic goal
- Never make spur of the moment decisions
- Trust your gut but never rely on it