Devoted to Managers and those that seek to improve their management skills

We've talked on managersrealm before about the downside of too much success. The recent loss by Amaranth Advisors LLC reveals mistakes that are easy to see from the outside looking in, but the hardest to see when you're inside the circle.

The hedge fund recently lost $6 billion through terrible energy trades; as a result the fund is about to shut down.

The problem the fund encountered was that they were highly successful for a couple of years in the specific area they were investing in. The results made them drunk with success - it cost losses in the billions because of it.

One reason this in inexcusable is because anyone that stays tuned to the markets knew that the extraordinary success in the commodity markets couldn't be sustained without a correction. Many people have been talking about that correction for some time now.

The last two years reveal that the hedge fund had $1.26 billion in profit in 2005 and $2.17 billion in 2006; the biggest amount of that being connected to energy. So they continued doing the same thing.

How does this connect to our businesses? We always must be careful when things are running up extremely fast and are dependent upon very few sources. This fund (which is a business) could have survived and thrived if they had diversified much more than they had. There was far too much reliance upon energy. 

Even whole countries have to be careful about too much growth and economies "heating up." They can implode as Amaranth did.

How can we protect ourselves? It's the old, simple concept of diversification. Make sure you're not overly reliant upon a small number of customers. If you are, begin to take steps to expand your base, without sacrificing quality of service.

Last, take a step back when things are really beginning to take off; look at things realistically. How long can this type of growth continue? How long should it continue? How can you use the growth to diversify, rather than remain joined to the fortunes of a very small number of clients?

It's easy to forget and drop solid business and management foundations when things get going good quickly. Always get out of the raging river when this happens and take a close look at what it means for your businesses or departments. Neglect it and you may not survive the consequences.