The investing lessons to learn from the Dick Smith Holdings Ltd failure

Credit: hnnbz

The failure of Dick Smith Holdings Ltd (ASX: DSH) just two years after listing on the ASX has been labelled by others as a debacle, a failure, a heist, and a disgrace, however investors need to use opportunities like this to reflect on what we can learn from this situation.

Keep it simple, stupid

For me, there’s a number of potential lessons here, but one major one that I think investors routinely forget.

In the case of Dick Smith, much like Metcash Limited (ASX: MTS), and the case with companies before them like Forge Group and David Jones, I always go back to a principle taught by Peter Lynch.

More than just numbers

It’s an unsurprising coincidence that in all of the above situations, investors were lured by the prospect of huge dividend yields owing to the greatly depressed share price and unsustainable yields in the previous years.

However, a company is about more than just numbers. If this wasn’t the case then the big fund managers that lost money in Dick Smith would have exited long ago, their resources are far superior to yours or mine, but they didn’t see this coming either.

Use your head!

Peter Lynch is famous for making excellent stock selections based almost entirely on his ‘feeling’ of a company’s stores. Would he buy from the store? Are the staff well trained? Is the service top notch? Are the products quality?

I wrote some time ago about Dick Smith and Metcash’s future, answering essentially the questions above, and was not complimentary on their potential. The fact is that shoppers looking for a good experience, with quality products and knowledgeable staff would head to JB Hi-Fi Limited (ASX: JBH) every time.

The group’s agreement with David Jones? David Jones was recording record low numbers for foot traffic at the time and their entertainment sections used to be hidden away in a closet on the eighth floor.

Additionally, Dick Smith was not viewed and did not want to be viewed as a premium brand, otherwise it wouldn’t have invested in cheap white-label products, so how could a partnership with Australia’s most premium department store succeed?

Don’t chase dividends

The lesson here is that investors need to use their heads, do some common-sense research beyond number crunching and do not be drawn into tempting dividend yields over 10%.

Instead, focus on sustainable yields from companies with a sticky client base and established products with high barriers to entry.

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. You can find Andrew on Twitter @andrewmudie

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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