Overview – Making a Decision Means You Don’t Worry About the Options You Turned Down, Right?
Whenever we make a choice, this typically means needing to forego the other options that are available to us. Choosing to eat at a certain restaurant means foregoing the chance to eat at countless others, and choosing to spend our time doing one activity means no longer being able to do other, alternative tasks.
For many people, making their decision marks the end of any thoughts associated with the options they chose to reject. After all, why worry about something you ultimately chose not to pursue?
There is no shortage of choices that investors will need to make during their careers, and one they’ll constantly need to make is deciding which investment opportunities to pursue with the limited capital they have at their disposal.
When looking specifically at public equities, there are all sorts of companies vying for limited investment dollars, meaning investors usually have an abundance of options to choose from. Upon deciding which company to park their money with, most investors usually don’t think much, if anything, about the competitors they chose to skip over.
However, just because you choose to pursue a certain company over its competitors doesn’t mean it will remain the superior option forever, nor does this mean that the competition will simply lie down and fade into obscurity. One of the realities of investing is that nothing stays still for very long: what seemed like a bad choice yesterday may soon prove to be the thing everyone flocks to in the near future, or vice versa.
Therefore, just because an investor chooses to go with one company instead of its competitors doesn’t mean the competition can be safely ignored and forgotten about.
Keep an Eye on the Other Guys, Otherwise, You May Soon Be Left Behind
Imagine you are a Blockbuster investor in the late 1990s/early 2000s. At its peak in 2004, Blockbuster had 9,000 stores worldwide and brought in $5.9 billion in revenue. With people constantly seeking to borrow more movies or video games to satiate their hunger for digital content, Blockbuster’s business model seemed bulletproof, and your decision to continue parking your money with them would’ve seemed like a no-brainer.
As the years went on, astute investors who kept up with developments from the competition would have noticed the meteoric rise of streaming and mail-in services in the late 2000s being offered by rivals such as Netflix, Hulu, and Redbox. These sharp investors would also have noticed Blockbuster struggling to stay abreast with its competitors in the streaming services and mail-in domain and would have eventually divested before it was too late.
Fast forward to the present and Blockbuster is nothing more than a sweet memory of a distant past. A once 9,000-store empire at its peak has now been reduced to a single franchise branch. The name of the game is now streaming, with services such as Netflix, Disney+, Apple TV, and Amazon Prime Video dominating the space. Who knows, perhaps streaming services may one day be a thing of the past as well.
Blockbuster is a high-profile example of a once-dominant titan being brought to its knees after failing to understand what its competitors were up to. Additionally, it also serves as a reminder to investors that just because a certain company is currently dominating doesn’t mean it will stay that way forever, meaning their investment isn’t guaranteed to remain safe forever either.
It would be incredibly naive to think that just because a certain company is dominating today means that its competitors will simply back down and accept this reality. Underestimate the competition for too long and a company that has grown complacent may soon find itself being left behind.
Blockbuster investors who noticed the steady rise of on-demand streaming services being offered by competitors and Blockbuster’s failure to stay abreast with this change would’ve divested long before everything came crashing down. On the flip side, investors who decided not to stay up to date with the competition were in for a very rude awakening.
Any investor who’s worth their salt understands that the investment merit of any company is malleable, so keeping tabs on the competition is a great way to make sure that they aren’t holding on to a ticking time bomb.
Good investors know how to pick up the pieces when an investment they own fails, but a great investor knows how to detect this impending failure and avoid dealing with the subsequent mess altogether, saving their time, energy, and capital in the process.
Finding Greener Pastures by Turning to Competitors
Whenever we become fed up with something in our lives, the next step most of us take with minimal hesitation is to look for alternatives that we feel will satisfy our wants/needs. Whether it’s something as simple as changing the brand of chocolate we eat to something as complex as choosing which country to obtain second citizenship from, most people aren’t afraid to look at what the competition has to offer.
When it comes to investing, keeping an eye on what the competitors your investments face is a great way to check if investment merit is being maintained and to ensure you have enough time to escape should you find yourself on a chronically sinking ship, but it also serves another purpose: it also helps you search for potentially greener pastures.
The investments you currently own may be fine, but that doesn’t mean you aren’t allowed to look for even better opportunities. As was mentioned in the preceding section, competitors won’t simply give up just because investors chose not to park their money with them. Instead, the competition will most likely ramp up their efforts to prove that they’re the better choice to go with.
People who want higher salaries search for better jobs, businesses who want to earn more revenue seek out new customers and/or expand the markets they operate in, and people who want a better quality of life look for new places to move to. If people and businesses are constantly seeking greener pastures, then what’s stopping investors from doing the same thing?
Some investors forget that, unless they’re bound by some sort of contract or other legal circumstances, they have no obligation whatsoever to keep certain investments if they no longer want to. If an investor feels that their goals will be achieved by putting their capital elsewhere, then they have every right to do that.
Sometimes, the better investment opportunities you’ve been looking for all along are the ones you chose to skip over in the past. There may be nothing wrong with a company that you currently have in your portfolio, but by keeping track of its competitors you may potentially discover that they offer even greater investment merit.
Investors who go on to achieve major success in their careers are the ones who refuse to settle with how things currently are. The portfolios they currently have may already be strong, but if there’s a way to make it even stronger then they won’t hesitate to pursue those opportunities.
At What Point Should Investors Start to Care About Competitors?
So, we know that investors stand to benefit by monitoring what the competition is up to because it allows them to determine if the investments they currently own still have merit as well as to identify potentially better investment opportunities. While this is certainly important, at what stage does an investor need to worry about the competition?
Should investors take the competition into consideration when they’re looking for prospective opportunities, after they’ve made a decision, or somewhere in between? To help answer this question, let’s break an investor’s decision-making process down into three major steps: preliminary screening, in-depth analysis, and the final verdict (and the subsequent portfolio maintenance that follows).
In preliminary screening, an investor’s main goal is to search for prospects that they want to investigate further. Factors such as brand/name recognition, word of mouth, background knowledge of a certain industry/field, and general popularity typically influence which prospects an investor decides to narrow in on. The competitors that a prospect faces are usually identified at this stage but will take on a bigger role in the next step.
When moving on to in-depth analysis, competitors take on greater importance here because they will serve as the benchmark with which you compare your prospect. No competent investor analyzes a prospect in isolation because they’d have nothing to compare their analysis and findings with. Therefore, when performing an in-depth quantitative and qualitative analysis of a prospect, this also means doing the same work for its competitors in order to ensure proper comparisons can be made.
Finally, we get to the investment decision. Assuming you decide to add the prospect to your portfolio, this doesn’t mean you can now afford to ignore the competitors you chose to pass over. Just like the investment you chose to go with, you will also need to stay up to date with what the competition is doing in order to do the things that were discussed earlier: check to see if investment merit is being maintained and to see if there are greener pastures elsewhere.
Competitors will always play a role in the decision-making process, but in different ways and with varying degrees of importance. Therefore, investors will always need to think about the competition every step of the way, all the way from when their interest is piqued by a potential investment all the way to the final investment decision.
How Many Competitors Is Too Much to Keep Up With?
Staying cognizant of what competitors are doing is a great way of ensuring the companies you have in your portfolio continue to deliver the performance you want, but a problem quickly presents itself.
Imagine you have five publicly traded companies in your portfolio, each of them hailing from a different industry, meaning no (or very little) overlap exists between them, meaning they all have unique competitors that the others don’t have to worry about. Let’s assume that each of these five companies has two major competitors that you follow closely.
So, for every company you own, there are two others you must also keep an eye on, bringing the total number of companies you must monitor for this particular portfolio to 15. Assuming this ratio of one investment/two competitors persists for all future additions, you can start to see the problem here.
Unless an investor chooses to have an extremely concentrated portfolio, chances are many are going to have more than five publicly traded companies in their portfolios to ensure adequate diversification is achieved. However, own too many companies in their portfolio and investors may soon find themselves unable to keep up with all their holdings and the competitors that they face.
Portfolio concentration vs. diversification is a topic we discuss in another article, so we won’t go into the details here. However, when it comes to keeping tabs on the competition, it’s clear that both approaches have their obvious strengths and drawbacks.
So, how does an investor discover the “sweet spot” that allows them to construct the portfolio they want while ensuring they can adequately monitor the competitors that affect their holdings? It ultimately comes down to their experience, personal capabilities, and preferences.
For one investor, keeping up with 30 different companies (including competitors) may be well within their abilities, while for another this may prove to be too much. Now, it’s entirely possible for an investor to expand their capabilities and shoulder a greater workload over time, but again, this comes down to what they feel they can reasonably handle as they progress.
It’s also important to understand that a portfolio composition is subject to all sorts of variables, and one that was proposed here is an investor’s ability to keep track of the relevant competition.
Given all the variables involved it’s very hard to satisfy all of them perfectly, so some compromises may need to be made. An investor may want a portfolio that’s diversified across several public equities, but this may mean reducing the number of competitors they monitor, running the risk of missing out on potential red flags or better opportunities.
In the end, investors must decide how closely they want to monitor the competition, and how important they believe that is relative to the other objectives they wish to achieve with their portfolio.
Wrapping Up
When making a decision, most people quickly forget about the options they chose to skip over. After all, this is something we do on a daily basis: we constantly think about where to allocate our limited time and energy, and in turn, this means needing to forego other options.
Investors make decisions all the time, and when it comes to the realm of public equities, investors are constantly choosing which companies to add to their portfolios. When an investor finally decides to add a certain company under their umbrella, surely that means they no longer have to worry about the competitors they chose to reject, right?
Just because an investment you chose to pursue is very strong today doesn’t mean it will stay that way forever, nor does this mean that the competitors who were unappealing at the time of your decision will remain that way also. The competition still plays an important role, even if you decided not to park your money with them.
Keeping your eye on the competition is a great way to check if a company you decided to go with is keeping up with the rest of the pack. Even if they are, it’s entirely possible for the competition to be performing even better, enticing you to go after these greener pastures.
The competition will always play a role in and influence an investor’s decision-making and, subsequently, their portfolio’s composition. However, there are many variables that influence how a portfolio is constructed and maintained. The ability to keep an eye on the competition is certainly one of those variables, but investors must decide how closely they want to keep tabs on the competition while also making sure other variables are satisfied to a degree that they’re happy with.
