Emotionless diversification

The recent news about Jessops, HMV and Blockbuster has made for some grim reading over the last few weeks and for many a shocking start to 2013: a possible 10,300 job losses and the potential closure of 1,000 stores.

By BpH Partner, Simon Brown

The sad thing is that commentators are saying that it’s been a long time coming. Amazon, iTunes, Sky, downloadable movies, digital photo processing and cameras on phones have been sweeping in for a while.

This needs weighing up against some online retail figures just published in the IMRG (Interactive Media in Retail Group) Capgemini e-Retail Sales Index:
  • Online retail sales up 17.5% year on year in December
  • 14% growth for the online retail market in 2012
  • Forecast for marketing growth in 2013: 12% with £87 billion to be spent online
  • Mobile to continue as key influencer.
For retailers it becomes a challenge of watching consumer behaviour and adapting fast enough. Creating a balance between in-store and online.

An article in The Telegraph, Thursday 24, 2013 “From high street to iStreet” talks about how High Street shops will become showrooms, somewhere to go and browse and learn about a product before you find the best price and buy online. These stores will possibly have to be funded by an advertising budget rather than what consumers ultimately spend in them.

A combination of overconfidence and familiarity bias leads us to keep hold of shares from a company we are attached to, perhaps because we brought or inherited them or simply shop with them. We tend to like buying UK companies we are familiar with rather than selecting the best companies in the world.

The message for the investor becomes “don’t have your eggs all in one basket. Diversify globally and spread the risk.” When one part of the market is in the doldrums, another may not be.

It’s also about curbing emotions. Not hanging onto the past, use an investment manager that buys and sell dispassionately without a view or emotions. As an example of this – of the three companies mentioned here, only HMV was listed when it went into administration. For clients holding the Dimensional UK Smaller Companies fund HMV represented about 0.002% of the fund as at 31/12/2012. They had been selling it over the last year because it has dropped below the market cap range for this fund.

For every piece of bad news, there is usually some good news to be found. A UK company’s bad news may be good news for a Korean company.

To be good investors we have to be unemotional and stick to our investment discipline by creating a balanced, globally diversified approach so that when we read about gloom and doom we know we are protected from overexposure to the bad news, which may in any event only be half the story.