How to Use More than One Company to Make Strategic Bets on an Industry

Hi everyone!

This is going to be a short post as I’m really busy and since it’s been so long since I gave you guys something, I figured a quick ‘here’s something to nibble on’ is fair. I’m writing from my phone so forgive any typos.

The thought I want to share on is how, as an investor, you can spread your bets across multiple company in order to ensure that your total investment is successful, and also that your downside is hedged or protected. It’s nothing complicated so I’ll just illustrate with a few examples from my own investing.

I bought Brown Forman sometime in 2012 after quite the wait. At the time I drank Jack Daniel’s and Gentleman Jack religiously and knew of their other spirit brands. Moreover, I looooved the company’s history, management and way of doing business and their financials were sound. So I loaded up on their shares. However, I didnt stop there. The other big elephant in the room was Diageo who owned almost all the other alcohol brands not already owned by Brown Forman and Renauld Picard. Diageo also had the advantage of being strong in emerging markets and being tops in not only spirits but also beer with Guinness. They were the perfect counterweight to my Brown Forman investment and so when I bought both stocks it effectively meant I was receiving some profits from almost any spirit poured in any bar across the world. Picard was privately held if not I would’ve bought some too.

The end result is that I would win as long as people bought alcohol, regardless of which company’s brands they bought. It helped that both companies were well run and attractively valued but the key was? I owned the full Industry so all growth was flowing to my portfolio. 

The same logic is why on buying Nike, I dipped into Under Armor and I’m looking at Adidas. Sneakers and sportswear are growing and getting more competitive but if I own those three, I get a cut of more than 90% of industry profits.

Same logic dictates that rather than debate which of the FANG stocks (Facebook, Amazon, Netflix and Google) to buy, the right move would’ve been to buy into all of them, and Apple in addition (I only bought Facebook and Apple in all the years so it’s not like I always did the right thing). That way all the crazy growth in the smartphone, search, social and ecommerce nexus are all fully accounted for in your portfolio.

A word of caution though. This isn’t a blanket rule to buy across industries regardless of the quality and valuation of the companies. No. Make sure all the companies you buy are well run and well valued. And that they’re true strategic complements. I wouldn’t buy AMC or FOX simply because I was buying Disney in the industry. One is a much much better business than the others and enjoys a completely different competitive advantage even if there is some overlap in their space. 

So the trick is to spread out but do so strategically. In a way that has the final results already in mind. 

Adios.

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