November so far has been a volatile month, at least in the sharemarket.
Just look at the market moves on 9 November three weeks ago … something about an overseas election which, when the results were announced, the market didn't take kindly to.
The S&P/ASX 200 fell almost 4% on the news that Donald Trump was elected leader of the free world.
The next day, 10 November, the same index rises 5.4% from the previous day's low. Why?
Donald Trump was elected leader of the free world.
Apparently, things aren't so bad 24 hours later.
And what about particular stocks on 9 November?
Bapcor Ltd (ASX: BAP) fell 8.5% and iSentia Group Ltd (ASX: ISD) fell 6.2%. But you could argue the companies these stocks represent are on the nose anyway for short-term reasons particular to each (see here and here).
When I see this sort of market volatility though, and ditto for 2008/09 (aka the GFC), I can't help but think back to the 1980s when I was a kid.
But no, it's not about markets or the '87 crash that I'm reminded of. Instead, it's business volatility.
For whatever reason, my mind turns to British PC maker Amstrad.
In the late '80s, Amstrad was a manufacturer of home computers, competing mainly with the likes of Commodore and Sinclair, but it also produced a range of MS-DOS/Windows-based PCs with gorgeous monochrome screens (sarcasm intended).
Their television advertising theme in Australia back then was …
"It's a business out there".
This slogan was a play on the old English idiom, "it's a jungle out there" meaning the world can be a dangerous and threatening place, a 'jungle' where every dog is out to 'do' the other in a world that can be only imagined as a vicious 'blood sport'.
As evidenced by Amstrad itself, things change and business volatility meant Amstrad eventually lost its market-leading position in the competitive European personal computer market due to problems with is third-party-manufactured hard drives. This was the beginning of its decline in the British PC market.
Throughout the 90s Amstrad then focused less and less on desktop PCs. The original Amstrad was eventually wound up by 1997 before being reincarnated as new Amstrad, a sole manufacturer of set top boxes to the UK satellite television industry, and eventually lost its right to live independently when shareholders sold out to BSkyB.
Yes, things change in the business jungle, and similarly to Amstrad's experience throughout the '80s and '90s in the UK, you can expect more of the same business volatility here in Australia.
Prime recent examples of business restructuring include:
- the spinning out of South32 Ltd (ASX: S32) from BHP Billiton Limited (ASX: BHP) back in the first half of 2015,
- the traumatic closing of the Masters Home Improvement business currently being conducted by its parent Woolworths Limited (ASX: WOW), and
- the German joint venture and acquisition in late 2015 of Joey's Pizza by Domino's Pizza Enterprises Ltd (ASX: DMP)
As sure as the sharemarket will continue to rise and fall this week, so will the efforts of companies to constantly try to improve their competitive position … or fail in the attempt.
Foolish takeaway
When it comes to volatility then, the world is indeed a dangerous place, but it's not just sharemarket movements you need to be wary of.
There's good and bad in the business world too (depending on which side of a transaction your company is on), but it's up to you to mitigate this with a sensible strategy of:
- selective and rational selection of a company's shares for your portfolio
- patience in allowing your companies' business strategies to play out (this can take years), and
- buying a sensible number of stocks that are not too few or too many in number (i.e., anywhere between 15 and 30 stocks is a sensible number for the purposes of diversification)
After all, if you bought Estia Health Ltd (ASX: EHE) a year ago, its 62% fall shouldn't kill you if Estia was only a 4% position in your portfolio, and likewise, you don't want to own too many stocks where a doubling in the share price doesn't impact on your net wealth in a meaningful way. For example a company like the a2 Milk Company Ltd (Australia) (ASX: A2M).
Anyone can buy shares in listed businesses, but to achieve success, you're going to need to be cognisant of the reality of the business (and sharemarket) world and develop an investment strategy to deal with it.
Hopefully, this article is a starting point for many of you.
