Disruption and Diversification


They were on the main streets of every large and small town. They were in suburbs and there were multiples of them in cities. They were crowded with people most nights of the week, especially Fridays. Many were small businesses owned by families, but there were also large chains who owned stores across states and countries.

Video stores.

Slowly over the past decade they’ve almost all disappeared. The giant of the industry, Blockbuster with 9000 video rental stores in the US alone at the company’s peak in 2004, now has only one store left in the world! Closer to home, the Civic Video store in Hastings closed its doors in January of this year.

While there are movie vending kiosks popping up to cater to those that are still using DVDs, the die looks cast. Streaming services like Netflix and faster internet/data connections are combining to erase physical media rentals.

In other words, a once iconic storefront that existed in most nearly every town has been disrupted by improving technology. Behaviour changed around the technology, with the ability to watch on demand and binge watch whole TV seasons in one go. No need to return discs or tapes by a due date any longer and all for a monthly fee less than two overnight rentals.

No matter where you look, you can find a similar story. Nokia seemed unassailable as the world’s largest mobile phone company. Then Apple released the iPhone in 2007. Polaroid and Kodak were taken to the cleaners by the shift to digital cameras.

Sometimes it doesn’t even have to be straight disruption by one company. Consumers may do the disrupting. The latest example is Kraft-Heinz in the US. In February, the Kraft-Heinz share price has dropped over 30%, with the dividend being cut a similar amount.

Among a host of problems, Kraft-Heinz has been under pressure as consumers move to cheaper private label brands or alternatively choose more health-conscious options. When your best-known food products are processed packaged options that are laden with salt and carbs, changing tastes and health conscious consumers become a real problem.

Many investors didn’t see any issue because of some of Kraft-Heinz’s most notable shareholders – Warren Buffett’s Berkshire Hathaway and noted Brazilian private equity fund 3G. Showing even the best can get it wrong or just be shown up by market changes that they may not see. If Warren Buffett can’t see shifting consumer sentiments, and what they mean for the businesses he owns, what chance do the rest of us have?

The arguments for owning Kraft-Heinz? It’s defensive, it pays a good dividend, it’s a household name and Warren Buffett owns it.

Excluding the Warren Buffett reason, these are reasons why many DIY investors find themselves buying a handful of individual blue-chip stocks. A few scant observations noting previous stability of the companies they’re getting into. It’s hardly research or a robust investment philosophy and it overstates the company’s past as being some sort of indicator for its future.

Blue chip stocks are heavily followed by Wall Street analysts and widely owned by the investing public. They are often extremely undiversified and overwhelmingly reliant on a handful of individual companies.  

Is it worthwhile to take extra risk?

Any company can run into difficulty. Most potential good news is already built into the stock price of a blue-chip favourite. Bad news tends to be unexpected and can cause significant damage to the share price.

A lot of retirement planning is focused on the ‘what if’ of what can go wrong and the ‘risks’ retirees face, but DIY investors and DIY retirees who buy individual stocks have a habit of looking at risk through the prism of the past. Great companies, household names, ongoing dividends.

Historical unbroken and increasing dividend streaks don’t make a case for unbroken and increasing dividend streaks into the future. A great company won’t necessarily be a great company next year. If a Kraft-Heinz falls from favour in your 6285-stock portfolio/561 bond portfolio, you’re unlikely to feel it.

The best defence against portfolio disruption? Diversification.


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