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Avoid All Eggs in One Basket

Most of us grew up with our Mothers sharing their wisdom through quick one or two sentence statements. Some of those statements later proved to be untrue – if you cross your eyes they don’t stay that way forever and if you swallow gum it does not stay in your stomach for decades. However, there are some truisms that Moms around the world know that should be paid attention to when becoming more educated about investing our business resources (human capital, equipment, marketing approaches, sales techniques, etc.):
     1. Too much of a good thing can be bad
     2. Don’t put all your eggs in one basket

 

Be careful with business investments, look to diversify.

Be careful with business investments, look to diversify.

When choosing where to invest one’stime, energy, and money, it might seem appropriate to pick a single approach to business (product line, service offering, strategy, etc.) that is outperforming all of the other options or competing initiatives in that market and put all of one’s funds into that one “winner.” However, while it may be a good thing today, there is no guarantee that it will remain as such and what appears to be a good thing now may quickly turn bad in the face of unforeseen occurrences.

Underlying this conundrum is that we all make decisions today based on that which is known. However, none of us have an ability to foresee tomorrow’s realities. We are therefore forced to make decisions based on imperfect data. Because of that, according to investment theory, it is recommended that no more than five percent of one’s investable assets be in any one holding. The same approach should be used in thinking about business operations (though the percentages may change, the concept of diversity across products, services, etc. should be adhered to in thinking about business offerings).

Few people saw the likely demise of Blockbuster before it began to fail. Up to that point, the ability to rent a movie at a local store for that night’s entertainment seemed like a winning approach. Investing in a company like that seemed like a very safe decision. Of course, that was before companies like Redbox and their kiosks in local stores became prevalent and Netflix became the supplier of choice for many. The strength of the cable tv programming providers and the capability of computers to stream video from online have all contributed to the weakening of Blockbuster. Because Blockbuster did not see the downside of being “all in” on their business model without regard to other options, they reacted far too slowly (if at all).  It is incumbent upon the business leader or company to perform competitive analysis to identify potential threats and opportunities, due to competitive incursions, technological changes, and marketplace dynamics.

Because we do not have an accurate way of telling the future it is best to spread one’s “investment” across multiple vehicle or opportunities s to ensure that if any one of them should not perform as expected, there is a reduction in the impact that portion of the investment will have on the total business. Now, of course, that also means that should that singular business investment suddenly take off and sky rocket, there will be a smaller gain than if the total invested amount had been consolidated in that one investment. Yet, the opportunity to switch the percentages always exists to leverage potential upside gains and reallocate resources.  However, given that none of us can “win” by trying to outguess that which is unknown, it is not only prudent, it is also strategically sound to diversify or allocate portions of one’s business investment dollars across multiple investment opportunities.

Just like too much of a good thing could turn bad, so too can putting all of your eggs in one basket become a negative. While the potential upside of getting a huge return is attractive, the reality is that Mom was right and more times than not, putting all of your eggs in one basket will create an unnecessary risk that will leave the investor’s financial portfolio scrambled.

David Zahn