Sunday, December 22, 2013

There’s Always a Bear Market Somewhere

A bear market is one where prices are dropping. Most investors search for, rejoice and succeed in bull markets (where prices are on the rise). But for even a fairly simple business (say, a local hot dog stand), some prices are going to rise (say, meat prices) while others might simultaneously fall (maybe mustard).

An entrepreneur might bet that her production prices will fall (or at least not increase) when she signs a contract to deliver a product that she does not have in inventory, knowing that she can have it produced and delivered. This is a bet that prices will drop or at least not increase. Like any bet, if the market moves against the entrepreneur, and her supplier wants to raise the price before she has placed her order, then she will make less than expected, or might even lose money. Likewise, if the price drops after the entrepreneur has made the sale, but before she has placed the order, she will make more than expected. High fives!

The traditional start-up model is to manufacture a thousand widgets and then try to sell them. The smart entrepreneur at least considers the option of making the sale first, and then producing or buying the products to meet the order.

Later on, as the enterprise gets bigger (for a few), it will likely require a minimum inventory because many customers might need the product immediately. But that’s a good problem for a later day.

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