Newton's Trap

Not only was Isaac Newton brilliant—inventing calculus and the theory of gravity—but he was also downright clever. You know those serrations on the edges of quarters and dimes? They were his idea. The serrations are useless now, but back when coins were made of precious metal, they stopped cheats from shaving coins in order to stretch their value.

Newton lived during the time of one of the greatest stock market increases in financial history, the South Sea Bubble. I won't try to recount this 1720 bull market, except to say that it made our own Internet bubble look tame. Newton recognized early that the stock prices were doomed to crash, so he sold his stock quickly for a profit. But then something happened.

Stock prices kept going up. Many said the market might never go down. The prices went up . . . up . . . until Newton cracked. Unable to stand seeing so many acquaintances getting rich, he dove back in.

You can predict the rest. The market crashed. He lost a lot.

Why am I telling you this? Because when there is money to be made, when market demand is good and getting better quickly, the temptation to abandon logic and caution can be powerful enough to overcome even one of history's smartest men.

For a manufacturing shop or business, now is the time to plan for how that organization will respond to the possibility of business getting better. I am not saying conditions will improve at anything like the rate of a stock market run-up, but for North American manufacturers, it does seem safe to say that prospects are looking up. How will you meet the challenge of greater demand in a way that doesn't leave your shop or company vulnerable later on?

Staffing may have to increase, for example. What is the right level of staffing that won't force you to endure a dramatic wave of firing if business turns down? Also, to what extent will the company remain focued on its core expertise, as opposed to pursuing increasingly tempting opportunities in other areas? Now is the time to think calmly about questions such as these.

There is a corollary in your personal finances, too, and this brings us back to the stock market. Now is the time to think about how your 401(k) or other portfolios should respond to a significant increase in stock prices. If an increase comes (and it's a big "if"), then when do you get out? One factor to consider is that the first Baby Boomers turn 65 in 2011. They may not cause the market to fall by selling their stocks as this date approaches, but if the market expects such a sell-off, then the expectation could produce the same effect.