On the power of starting with no baggage, sunk costs, or past poor decisions:
Part of the reason the economy recovered slowly after the financial crisis was that businesses, spooked by the recession, relentlessly reviewed their costs. “I just see business after business after business which has rationalized so that it can protect its balance sheet and earning power while utilizing fewer people” Charlie Munger said in 2010.
So began a new life for the concept of zero-based budgeting.
Zero-based budgeting is the idea that each year’s budget should be created from scratch, rather than using the previous year’s budget as a baseline. Jimmy Carter made it famous during the 1970s – the last time business and government budgets were as strained as they were in recent years. The number of large companies using zero-based budgeting has increased 50% since 2008, according to Deloitte. Campbell Soup, Kellogg, and Kraft now use it.
It’s based on a profoundly sane idea: Things change and evolve, so the phrase “this is how we’ve always done it” should be replaced with “what do we need right now?” A full reset, unburdened by the past.
You can’t (and shouldn’t) always reboot at the first sign of trouble. We should measure the cost-benefit of the full reset and use it when possible and time and space permit:
There is a counter to this: The secret to investing is enduring uncomfortable situations, so selling at the first hint of imperfection is usually regretted. But its opposite – an unshakeable anchor to past decisions – is perhaps worse. The saying, “Our favorite holding period is forever,” should be replaced with, “Our favorite holding period is until the facts change.”