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Look for Leading Indicators of Leading Indicators of Irresistible Forces and Trends

Mar 27, 2008
To get the most benefit from your leading indicators, or barometers, you need to know if the amount of advance warning you get from them is sufficient for your needs. If not, you'll need to adjust your strategy accordingly.

If you are in the oil rig rental business and your longest lease is now out for twenty-four months, the optimum amount of anticipation you need would be something more than twenty-four months. The minimum will be quite a bit less than that.

Suppose that only half of your rigs are under contract for six months or more. You can get a substantial benefit from having just over six months of lead-time warning of an oil price trend shift. In cases where you'll want to buy or build more rigs, the lead time must lengthen to allow you to take these capacity-adding steps.

This analysis is more complicated if oil price trends last a long time or frequently move in new directions. If the latter is true, the preceding analysis is fine.

If the trends last for many years, you may be able to prosper with shorter advance warning because during a sustained trend your decisions will usually be 100 percent accurate. The only exception will be if you falsely perceive trend changes that don't occur. The continuing trend sets you up as though you had more than a twenty-four-month lead-time understanding of the future until the trend changes again.

Let's go on to say that your oil rig company has found leading indicators for the irresistible force of oil price direction that work well only two months ahead. By either the test of what is needed at a minimum or what would be beneficial, you need more warning than that.

So you need to find better indicators. But you've already done a lot of work, and no better ideas have surfaced. How will repeating the process that lead to finding these barometers that provide insufficient warning make a difference?

What you have to do differently when you repeat the process is to keep reapplying the thinking steps to the causes of the changes in leading indicators you have located. You keep doing this until you have moved far enough back into what causes the oil price trend to shift to provide you with the length of warning you need.

For example, assume you had found a relationship between the leading economic indicators for countries and the future price for oil. When you repeat the process, you need to look for leading indicators of the leading economic indicators for these countries. Then test these once-removed leading indicators of country leading economic indicators to see how well they predict changes in the direction of oil prices.

As you move further away from the event you are trying to anticipate, be careful to test that there is a logical reason why event A (a change leading economic indicator of a leading economic indicator) should lead to event B (a change in the leading economic indicator). If you are not sure, test out the relationship you have found with experts for their reaction to what you have found. These experts may be able to suggest another data series that is obviously more likely to be a cause, and which provides better advanced warning

This iterative thinking involves looking for potential causes that act indirectly on what you are trying to anticipate, like checking the color of your grandparents' eyes to help you understand why your eyes are brown when your parents' eyes are blue, and to predict what color your children's eyes may be.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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