Diworseification

By Jim Tune

Peter Lynch is a legend on Wall Street. As the manager of Fidelity Investments’ Magellan Fund between 1977 and 1990, Lynch averaged a 29.2 percent annual return. His fund consistently doubled and even tripled the S&P 500 index. He did this without the help of complicated algorithms or insider trading. Lynch takes a commonsense approach to portfolio management. His most famous investment principle is simply, “Invest in what you know.”

In his best-selling book One Up on Wall Street, Lynch devotes a chapter to listing the kinds of companies he stays away from. He cautions readers to avoid diworseifications—a word Lynch coined as a play on the word diversification. He suggests that a business that diversifies too widely risks destroying its core business because management’s time, energy, and resources are diverted from the original investment.

Apr20_Tune-art_JNLynch gives numerous examples of thriving companies that had begun accumulating cash. When a business has an excess of cash, management can deploy the cash to buy back stock or increase dividends, resulting in a profitable win for shareholders. All too frequently, though, profitable companies prefer to blow the money on foolish acquisitions, branching into industries they don’t understand.

Take Gillette, for example. Gillette has an incredibly profitable razor business that generates large amounts of cash for the company. Some time ago, instead of buying back its shares or rewarding investors with better dividends, Gillette diworseified into ballpoint pens, cigarette lighters, blenders, office products, and even digital watches! This led to a dramatic slide in profitability. It took years for Gillette to recover, getting back on track only by divesting itself of losing operations and refocusing on its core shaving business, where it enjoys market dominance.

Gillette had lost sight of the fact it was the razor business that gave the company its unique edge (pun intended).

In the movie City Slickers, Billy Crystal plays a vacationing businessman who takes on the adventure of a cattle drive. In the middle of the drive, Curly, a gruff and seasoned cowhand, tells Mitch (Crystal’s character) that the secret of life is just one thing. Curly emphasizes the point by holding up one finger and saying, “One thing. Just one thing.”

Mitch is perplexed and asks, “But, what is the one thing?”

Curly responds, “That’s what you have to find out!”

Sometimes we overcomplicate church. In an attempt to attract new “customers,” we diworseify into a host of programs that put us at risk of neglecting our core business. And what is the church’s core business? I have a few thoughts on that, but ultimately that’s something for your church to figure out.

I remember a consultant who liked to ask aspiring businesspeople: “How do you beat Bobby Fischer?” (Fischer was World Chess Champion in the early 1970s.) The answer: Play him at anything but chess.

Know what your business is, then continually ask, “How’s business?” Doesn’t seem that complicated to me.

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