Oasis Business Blog

Portfolio diversification seems to be key, as mentioned by students from the PMF program and professors of COMM 101, but how exactly should we diversify in an intelligent manner to increase yields?

To answer my own question, I first read “Correlation – The Basis of Risk Management” which states that a stable portfolio contains investments from non-correlating or negatively correlating assets, for example scarves and sandals. If it snows, then scarves will likely increase in value while sandals will drop; if it is sunny, the vice versa will occur.

Theoretical oscillation of perfect negatively correlated assets

Initially, buying negatively correlating assets seemed unintuitive.

While it is true that diversification can help minimize the risks of encountering a complete catastrophe, I felt there was another side of the coin that was disregarded. In essence, diversification limits profits if there is an unusual growth in a specific company or sector. In addition, if you have more knowledge or have access to faster information channels in a specific field, then it may be more profitable to focus specifically in that sector.

For example, during an interview with Warren Buffett, he was asked what was his greatest mistake. He said that it wasn’t investing in the wrong stocks, but rather not investing in the ones he knew more about.

 

That said, I think it is important to have a combination of diversification and specialization.

Just recently, in June, the Supreme Court of Canada granted the Tsilhqot’in the right to 1750 sq km of land, signalling a shift in judicial decision that will lay precedent for aboriginal cases to follow.

While this is a landmark decision, I believe it is only a small step towards recognizing aboriginal rights.

Businesses, specifically resource extraction businesses, who had interests in the land before will still hold their interests now; those who attempted to create an unfair deal before will still try to create an unfair deal now. It is undeniable, however, that the passing of this decision is a significant legislative barricade that will thwart many unfair deals; it is just my opinion that more needs to be done to truly place both parties, the business men and the aboriginals, on the same level.

What exactly needs to be done though?

I do not know for certain; I do not know because I don’t understand the situation well enough to make a concrete conjecture; I cannot feel the anger, despair and betrayal of the aboriginals nor can I comprehend the influences of a company and its duty to its stakeholders.

But I can say that one day, I will try my best to understand.

After reading a blog on the Harvard Business Review on consensus and how business decisions are made (link), I started to wonder about the hierarchical structure of a company and why in many traditional structures, the decision making power is often relayed all the way to the top.

One reason, I believe, is that people are simply are too un-equipped with business tools to make a judgement on their own because of the risk of a failed experiment or venture. In fact, many would happily shelve the task to higher executives.

Executives deliberating endlessly

The issue, I believe, lies within two fields: ineffective operations forecasting tools and poor managerial decision tools. As discussed in COMM 101’s operations class, forecasting is important to determine whether a proposed change’s outcome will bring in enough sales to justify making that change. Even providing basic forecasting information can produce more confident decisions.

In addition, managerial decision tools can analyze the potential profits or resources that needs to be devoted to a venture. A clearer understanding of costs, with amortized and sunk costs removed can help solidify whether a venture will be successful in generating profits.

Tesco, one of the largest retailers in the world, has been under performing in recent years and, in an attempt to draw more investment, overstated its profits by 250 million. The scandal, which has caused an all out investigation, has dropped Tesco stock and market shares even lower.

Price per Share from Sept 29 – Oct 2

Tesco currently faces the challenge of both retaining consumer loyalty and dispelling share holder concerns.

However, there is chance for Tesla to stabilize. On the consumer side, Tesco needs to prioritize consumer satisfaction and after-sale services as recent goals to expand internationally have caused Tesco to cut staff drastically. This is perhaps the main reason that services in UK has been neglected.

On the investors side, there lies a problem with trust, as shareholders who are more knowledgeable of the scandal, will probably be cautious of reinvesting into Tesco. In fact, a prominent investor said:

“I made a mistake on Tesco. That was a huge mistake by me.”                                                                                                                              -Warren Buffet

Tesco needs to straighten its image and changing its image won’t be easy as Trout and Rise expressed in their book Positioning: The Battle For Your Mind; thus I believe that Tesco should focus on recapturing consumer market instead of appealing to investors.