Diversity is the Key to Survival

Jim Cramer of CNBC has a game that he plays on his show Mad Money called “Am I Diversified”.  Viewers call in, list the stocks in their portfolios, and Jim determines if the stocks are from different sectors and industries.  His theory is that a good stock portfolio must contain stocks from different sectors, so that as one sector goes down your portfolio is protected by the sectors that increase.  And this theory is the same theory that any good financial advisor abides by.  So if you would diversify your investment portfolio, why would you not diversify your client base.

At last my last company, I stressed to the project managers and surveyors the importance of maintaining a diversified portfolio of clients.  Having lived and worked in northern California during the recession in the early 1990’s, I saw a lot firms that dealt only in residential development go under.  The same is happening today throughout the country.  Luckily, my firm did diversify into commercial and industrial and even though they are struggling, the lights are on and the open sign still hangs from the door.  We could have chased the big bucks that were there during the housing boom, but many of the companies that did are no longer in business.

I divide the developers into the following six groups:

1. Residential Single Family

2. Residential Multi family

3. Commercial

4. Commercial Office

5. Industrial

6. Government

Development among these six groups goes in cycles as an area is developed.  First come the residential builders as new neighborhoods are formed.  Once there are enough rooftops to support it, the commercial shopping centers, strip malls and gas/convenient stores spring up.  Once the commercial development is there, the warehouse and office buildings spring up in support of them.  And once the population grows to a certain point, the government steps in to produce highways, water/wastewater facilities, parks, etc.  And this causes more residential development and the whole cycle starts over.  This is why diversification is essential.  You want to be involved in the entire cycle, not just one phase.

The last couple of years have been difficult in the civil engineering and land development industries because the lack of lending by the banks has broken the cycle.  Residential development boomed over the last ten years and many areas are now left without the necessary commercial development needed to support them.  This is our industry’s “green shoot.”  I have spoken with many commercial developers recently that say if they knew the funds would be available in six to nine months, they would begin the design phase for future projects.  So as the banking crises eases, jobs will again start to appear.

In the future, when you’re looking for new clients, remember where in the cycle we are and plan for the future.  By staying one step ahead of the cycle and diversifying, you give yourself a better than average chance of surviving downturns in the economy.