It’s one of the oldest and most recognizable companies on the U.S. market, but what can Coca-Cola teach us about the importance of diversification?
To the beginner investor, the operations of a powerful multinational corporation like Google, Apple or Microsoft can seem discouragingly remote. What real relevance could the decisions being made “up there” have to me, down here? Attempting to draw personal finance lessons from the activities of such an entity would be as absurd as taking fashion advice from a king.
Or so it can sometimes seem.
But more often than not, the difference between a successful corporation and a successful investor is simply a matter of scale. True, some companies and some individuals have a larger theatre in which to operate, but the principles that drive success – however, success may be defined – tend to stay consistent at all levels.
When it comes to investing, there are few principles more crucial than diversification. It is the “silver bullet”, as we say at Rubicoin, the strategy best suited to avoid risk and achieve the most consistent returns in the long term.
To illustrate this point, let us look at one of the world’s most famous and powerful companies, Coca-Cola, and how a smart diversification strategy has kept it thriving for decades.
While its flagship product continues to dominate the carbonated drinks market and remains a cultural icon with few rivals,Coca-Colaa has lately found itself at odds with the growing (and dare I say, millennial-dominated?) trend towards all things healthy and organic. For a company less committed to brand diversity, this could have marked the beginning of a slow and inexorable decline in market share.
Not so for Coca-Cola.
“We’ve got to experiment,” said CEO James Quincey in a recent interview with CNN, “we’ve got to try new things.” By “experiment,” Quincey didn’t merely mean shaking up the company’s famously secret recipes: he meant acquiring new brands, venturing into different markets.
In a word, he meant diversification.
In fact, the classic Coke stands at the centre of a huge, five-hundred-strong portfolio of brands, ranging from fashionable vitamin drinks to juices, from flavoured milk to iced tea.
The company’s first acquisition took place way back in 1960 with Minute Maid orange juice, and its most recent product launch, a Japanese alcopop which hit the shelves in May 2018, marked an unprecedented foray into the world of alcoholic drinks. In the seven decades between these two landmark moves, Coca-Cola’s defining approach has been characterized by restless activity and constant portfolio diversification, and it shows no signs of letting up.
The investment lessons to be drawn from this emphasis on brand variety are quite clear.. Of course, neither Quincey nor any of his predecessors could predict the future. But what they could do was keep the company’s presence more or less evenly spread throughout the entire beverages industry so that volatility in one area would be reassuringly counterbalanced by stability or growth in another.
Not only does this strategy account for Coca-Cola’s continuing dominance, it allows the company to take more calculated risks, since, by definition, less is at stake. Speculative and high-risk investments are best made when backed by a solid and diverse asset portfolio.
Ideally, a good personal investor will go a step further than Coca-Cola, spreading his or her monies not only across different companies, but across different industries, markets and countries, allowing for the smallest amount of risk in troubling times.
Because while you might think you have the ‘Real Thing’, that doesn’t mean it will always be a sure thing, and there is no better strategy than healthy diversification to give you a footing when those market storms come rolling in.
Rubicoin operates a full disclosure policy. Rubicoin staff may currently hold long positions in some of the companies mentioned in this article.