Common Stock - Industry Attitude

The attitude of labor toward certain industries deserves mention. Those industries should be sought where labor costs and the total amount of labor participation is small; in those cases where labor is involved to a greater extent, the general attitude of the union involved should be carefully appraised. In some cases, mechanization and automation are reducing the labor problems which certain industries must meet.

Finally, the subject of diversification becomes important. A business management which seriously undertakes diversification is protecting itself, since experience has shown that dependence upon a single product or service is open to very severe reverses. This means, for example, that a petroleum refiner may find it advantageous to go into the field of petrochemicals and that a rubber firm will become interested in the field of rubber chemistry and processes.

We must emphasize, however, that diversification achieved by merely buying a heterogeneous collection of other firms is not the real thing; it may prove profitable, but it does not provide the foundation upon which to build for years to come, because it often does not permit true integration. For example, it would be better for a machine-tool company to acquire a builder of road-making machinery than, let us say, to merge with a food processor.

Similarity of "know how" is very essential to success in such a case, and there have been numerous instances in which attempted diversification by acquisition has proven a great disappointment. The management of a fully integrated company is a big job in itself; the management of a firm with distributed branches is a still larger task; but where a series of far-flung enterprises are thrown together that call for very different know-how or are even in unrelated fields, it is doubtful if one can consider it a master stroke; to the contrary, it will rightly cause many an investor to shy away from such a situation. Let us be reminded here, as always, that there is a strong distinction to be made between investment and speculation.

Last of all: what is the outlook, both for the immediate and the long term? Are prospects really bright? Does the industry represent something basically sound? Is it really "here to stay"? In case of doubt, do not invest; too often you may be speculating without knowing it.