When picking and reevaluating investments it is important to be dealing in sound investment advice versus clichés. Thirty or more years ago the cliché was that if you know how to manage you can manage any and everything. That cliché led the world’s leading copier company, Xerox, to get into the insurance business where they nearly lost their shirt. While they were dealing in clichés Xerox also lost its way making copiers.
We all look for short cuts to make our lives easier. When we have a successful routine worked out we repeat it to save time and money. Sometimes when investing we look for efficient shortcuts to sound investment advice and find ourselves falling prey to clichés.
Although Xerox fell prey to the “you can manage anything” cliché years ago so did its investors. After Xerox started the business of making copiers sound investment advice was to buy Xerox just like sound investment advice was to buy IBM until the personal computer changed the world and IBM found itself a step behind.
By the late 70’s Xerox had tons of cash and chose to reinvest instead of paying taxes on profits and then paying dividends with the taxed income. So, they looked around for a business they could buy and manage, namely insurance. While Xerox was dealing in clichés and losing money on its insurance business it neglected to make its copier business more efficient and Asian competitors ended up sending copiers to America and selling them for the same amount of money that the inventor of copiers spend getting their copiers out of the door of the factory.
Clichés were nearly fatal for Xerox. Then Xerox changed management, wrote off the failed insurance business over several years and improved the quality of its copiers while reducing cost. By the mid 1980’s it was sound investment advice to buy again. However, an attempted buyout emerged.
In the midst of the buyout the folks running the attempted takeover ran out of money and had to sell stock to cover options. Xerox’s price dropped from the 60’s to less than 30 in an hour. At that point anyone following sound investment advice bought Xerox and lots of it. At that point, all clichés aside, Xerox was doing well, making money, and, as it was writing off its insurance company losses, not showing a profit.
Those who knew what was happening with Xerox and followed sound investment advice found that their just recently purchased $30 shares of Xerox were worth $70 the next day.
These sorts of situations are always present. A current situation is the set of clichés all stating that the old line media companies will all go under based upon competition from the internet and bloggers. That is not sound investment advice. It reminds one of the clichéd that books would disappear when computers became popular and that all reading would be online. Someone needs to go out and get the news, organize it, report it, and be a standard reliable source for accurate reporting. Sound investment advice is to look past the clichés and find which media companies are undervalued, have cash, have good products, and will survive. Then invest on a downturn and replicate what those following sound investment advice did years ago with Xerox.