Connecting the Dots

As a child I enjoyed the “connect the dots” drawings that came with the weekend newspaper and in some coloring books that my parents would buy for us. Those exercises taught me that if a person could correctly connect the dots, they’d see something that wasn’t always obvious or previously not seen clearly. Today more than ever in both business and life I think that success hinges on connecting the dots.

These days we are living in such a media saturated hot-house of spin, half-truths and incomplete information, that even knowing where the dots are has become more challenging. Sometimes, those relevant dots are separated by months or years. For example, back in 2005 Apple Computer maestro Steve Jobs gave the commencement address at Stanford University and in that speech (http://news-service.stanford.edu/news/2005/june15/jobs-061505.html ) talked about connecting the dots in his life. We know that it took years for his “dots” to be aligned into a life and purpose, but the resulting picture has served him extremely well it seems.

As you survey the morning paper or scroll through the stacks of information that the Internet brought you, there are probably some useful conclusions to be drawn from what may seem like a mountain of disparate pieces. You have probably heard of the “Butterfly Effect.” The phrase refers to the idea that a butterfly’s wings might create tiny changes in the atmosphere that could ultimately cause a tornado to appear or prevent it from appearing. The tiny flapping wing represents a small change in the initial condition of the system, which causes a chain of events leading to large-scale phenomena. If the beautiful butterfly had not flapped, the trajectory of the system may have been vastly different.

Since the subprime mortgage mess is still roiling the credit-finance scene, let’s use that as an example of how the dots can appear. Dot #1: Back in the 1970s, home mortgage loans were typically held onto until their maturity by the banks and Savings & Loan institutions who wrote them. But in 1979, a trader at Salomon Brothers concluded that his company could bundle thousands of those mortgages together, capture that stream of income and use it as the basis of a bond issue. The trader Lew Ranieri was right, and a seductive new genie was let out of the bottle.

Dot #2: By the late 1980s and into the ‘90s, the lenders began to relax credit standards since they were not directly on the hook with borrowers anymore and in fact they wanted to create more of that very saleable product, mortgage loans. The hungry house hunters who couldn’t qualify for a loan under strict standards did get loans at higher rates aptly called sub prime loans. Many fortunes have been made in that marketplace.

Dot #3: In the sometimes greedy and incestuous world of Wall Street, the banks who used to own the loans eventually became customers investing in the “baskets” of debt instruments created to keep the mortgage marketplace liquid. In the drug dealer’s culture there is at least one piece of good advice and that is “don’t get high on your own supply.” But that is what many banks began to do. Some investors, an unfortunately small percentage saw the dots lining up and fled that marketplace. Hubris, greed and stock price addiction kept some big players at the table even as the odds turned against them.

Back here in the world of small business, one of the frequent questions I’m asked is “what is a good business to get into?” My first response is that your chances of success are infinitely better if you go into something you love—a lot. Then I advise that the potential entrepreneur look around at statistics in their area of passion. For example, more American adults than ever are drinking wine, according to a new survey by the Wine Market Council. The poll found that between 2000 and 2005 the wine drinking population in the U.S. increased by 31% among adults in households with a household income greater than $35,000. Those numbers point to an opportunity such as opening a wine bar. Have you noticed the increased number of wine and Tapas establishments in the past several years?

Yes, the dots are often there for any observant person to see. All it takes is a bit of diligence and digging. I don’t recall who told me this, but there is truth in the advice that if you can see the parade, it’s too late to get in it.