The Strength Of Boring Businesses During Crisis

Nobody likes to do the boring stuff. There's no fun in it, especially in the beginning. But oftentimes, the boring stuff is a vital component of the whole.

Learning to play a musical instrument can be challenging. At the start, beginners spend a good number of hours practicing repetitive exercises or basic techniques. These practices can be considered monotonous and perhaps, boring, especially when compared to playing harmonious melodies at the advance stages.

However, the 'boring' foundational work is a prerequisite in developing the necessary skills needed to progress and play harmoniously at advanced levels.

Unlike trendy and innovative businesses, boring businesses seldom receive the spotlight. They're mostly in the background providing value to society. These are usually businesses that provide basic goods and services to a wide number of customers.

When it comes to investing, their simple business nature is often overlooked and underestimated by many investors as there isn't any strong incentive or attractiveness to them.

It's a different case when a financial or economic crisis happens. Despite their boring nature, they have a greater ability to weather the storm and come out stronger than trendy or flashy businesses.

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The Nature Of Boring Businesses

One of the main differences between trendy and boring businesses is the volatility aspect. Trendy businesses both thrive and get crushed by volatility depending on the direction it takes. We could say that a downward volatility is another loose term for a financial or economic crisis.

During a financial crisis, all businesses are affected. Boring businesses are the least affected of them all. This is due to the stable and mature industries they usually operate in, which often have low volatility and a high barrier of entry.

By definition, boring businesses are companies that provide basic and essential products and services. Examples include construction, shipping, insurance and utility companies. This basic and essential value that they provide allows them to have a huge, consistent and loyal customer base that bring in a strong cash flow.

A good example of that is wholesale retailers. These are basically businesses that sell various products in bulk to retailers.

There's a thriving one in my area that I've been observing over the years. Apart from the slow and steady progress of the business at its early stages, what was actually revealing to me from my observations was the success factor.

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Success was hardly dependent on innovation. Rather, having and maintaining a good reputation of reliability and efficiency. This brought in a lot of repeat customers which is a major contributor towards building a strong cash flow.

Times Of Crises

During the 2020 pandemic, businesses were labeled into two categories, Essential and non essential. Non essential businesses were closed and essential businesses were open with strict conditions put in place on how to operate.

Looking back, I wonder who made the categorization and what were their criteria. It seemed more subjective than objective.

During the covid crisis, most boring businesses were categorize on the essential section and they benefited from the increased demand for their product and services. Customers had to prioritize their basic needs over non essentials or luxury items.

This is also were having a strong cash flow becomes important. Businesses that have it a better suited to weather the storm and adapt to the changing circumstance.

Granted, the profit margins with boring business are slim given the perceived value of basic goods and services.

However, from a scale viewpoint, the numbers easily multiply with more customers. And at a time of crisis, there are plenty of them.

Besides, given the basic and general needs they serve, boring businesses tend to have many customers by default. One could even say that they make more revenue during a time of crises than any other season apart from special occasions.

For me, boring businesses are great for long term investment and generating a steady cash flow. Meanwhile, in the short term, I enjoy riding the wave of volatility and learning the lessons therein.


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Posted Using LeoFinance Alpha