Burying Borders - 3 Investor Lessons

Last Updated Jul 25, 2011 10:27 AM EDT

What a pleasure it has always been to stop by my local Borders and leisurely browse through books that, admittedly, I would then order from Amazon. It seems those days are soon to be over, but there is still an important lesson here for investors.

Borders has a rich history dating back to the opening of a rental library in 1933, later becoming Borders Group, Inc. (BGP) when it made its public debut in 1995. It displaced the mom and pop local bookstores by its ability to offer customers many times the number of titles. Along with Barnes and Noble, Borders altered the landscape of how books were sold.

Within a couple of years of going public, shareholders were rewarded with the stock price tripling. It was a stock darling. What could possibly go wrong?

We all know the ending to this story. Amazon.com and the eBook rendered the model obsolete much faster than Borders did the same to the local bookstores.

Lessons learned
Using hindsight bias, we can clearly see how flawed their model was, and that they should have entered the e-space much sooner. But, trust me, it wasn't that obvious back then. Here are three key investment lessons we can take away from Borders' fate.

#1 No company is bullet proof. As Apple Inc. was setting a new record, and many analysts were declaring Apple will be the most valuable company on the planet, it was as important then as it is now to remember to always be aware of any company's vulnerability. Only a few years ago, Nokia sat on top of the mobile phone world. State of the art today is ready for a museum a year or two later.

#2 The obvious isn't so obvious. Today it's obvious that Borders should have entered the internet and ebook space much faster than they did. Just as it should have been obvious that Kodak was too late in realizing film was about to take a major backseat to digital. But this perspective comes via hindsight bias, as the unexpected twists and turns of competition and technology weren't quite so obvious at the time.

#3 Diversification is key. Understand your crystal ball is broken. Companies that currently dominate the game may soon be warming the bench. We don't actually know what companies will still be around in 20 years, much less which ones will prosper.

I come to bury Borders, not to praise it.
I'm very saddened by the death of Borders, and even more so that their 11,000 employees will soon be losing their jobs. Capitalism can be a cruel and capricious beast. However, technology and competition bring both lower prices and more convenience and features to all consumers.

And though my index fund lost money as Borders blundered, it gained even more as Amazon prospered.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.