Saturday, February 7, 2015

Radio Shack: The End of an Era {how bankruptcies have shaped how I approach investing}

Although I've never been a shareholder of this company and much less a frequent customer by any means, it made me sad to hear that Radio Shack is filling bankruptcy. I then started to ask myself why I cared so much. Well, the main reasons is probably that I have very fond memories of visiting this store with my dad a whole lot when I was growing up. 

Growing up in the 1990s; Radio Shack was "the place to go" for cool gadgets, cables, house phones, electronics, random artifacts, pretty much anything up and coming could probably be found at this place. I remember my dad loved it. Places like Best Buy or Amazon were far in the future (or maybe not so popular or known) during the time when Radio Shack was "hot".

Something I have learned during the course of my life, specially as a business student in undergrad and graduate school is this:

The world of business is fierce and has no mercy. 
If companies cannot keep up they will get run over.
If your product is making money, no one cares about stealing ideas and running with them.

If you were born in the 80s, like I was (or long before) you probably witnessed many other great companies get disrupted, go bankrupt and/or become completely irrelevant at the blink of an eye. Blockbuster and Kodak are just two companies that come to mind-- companies that were once MAJOR within their industries, at the top of their game. I would conclude that a very small number of people saw the end of these companies coming. Sure, there are visionaries in this world that have the amazing capability of seeing disruptions in particular industries long before they even happen. However, many of us are often surprised and caught off guard. At least it feels that way. 

Now, with the Radio Shack situation, we cant say we didn't see this coming. As a matter of fact, they did try (maybe not hard enough?) to fight the fierce, aggressive, and merciless competition that comes with eCommerce. Perhaps had they not tried at all, Radio Shack would have been long gone several years ago. 

Is interesting to think that not too long ago going to a radio shack used to be the first thing that would pop in to peoples minds when thinking of purchasing electronics or components for any kind of project. Those days are long gone and the company has become an afterthought. Places like Walmart, Best buy, Amazon, or even local pharmacies (which seem to sell everything now-a-days) have taken the forefront in peoples minds when making those type of purchases. As the saying goes:

When I first started investing (about 7 years ago) and people would ask me how I choose the companies I invest in--- I would say that, as a long term investor, I would make most of my decisions by buying companies that had been around for "generations" and I didn't see going bankrupt anytime soon or never. I soon realized this strategy can be a little dangerous and is in fact flawed. Obviously, I have grown tremendously as an investor and the amount of years a company has been around is no longer a determining factor. 

Sure, I still follow that mentality in a way. However, today I am extra careful with this process. For instance, even if the company has been around for generations, one of the main factors I look in to is the industry in which that company operates and how said industry is evolving. If I see any signs of disruption or fierce competition of any kind, that's a red flag for me to dig deeper. 

For example, when I think of McDonald's (MCD), for instance, a company where I've own shares on and off for about 7 years; it makes me wonder whether they will be able to keep up with the disruption in this new generation of "health conscious" people. I believe their brand is still solid and strong and they are in fact part of the 'American trademark'. For instance, if you were to ask people around the world to name "american food" one of the first things that would come out of peoples mouths would be "hamburger" or "McDonald's". But, for how much longer? Maybe for another 20-30 years? Maybe another 10 years? Just something to think about.

Radio Shack was around for 94 years, Lehman brother was around for 165 years, Kodak build an incredible reputation for over 100 years before they became irrelevant due to competition and disruption by the digital world. Blockbuster led what felt like a monopoly in video entertainment for over 20 years. Crazy to think about how irrelevant those companies are today, if they still exist at all. See what I mean?

And that's all folks. 

Tell me, what other brands come to mind when you think of companies that were once leaders and are irrelevant today? What are your thoughts on the Radio Shack Bankrupcy?

As always, thank you for reading and cheers to profits!