Rebalancing — For Large Companies to Stay Competitive


Dollar cost averaging or rebalancing are practices used by some of the best investors. What dollar-cost averaging really means is systematically putting the same amount of money across your full portfolio — not just the stock portion. Volatility can be your friend with dollar-cost averaging, and it can also allow for another technique that will keep you on track, “rebalancing.”

You have to take a look at your buckets and make sure your asset allocations are still in the right ratio. From time to time, a particular part of one of your buckets may grow significantly and disproportionally to the rest of your portfolio and throw you out of balance. Say you started out with 60% of your money in your Risk/Growth Bucket and 40% of your money in your Security Bucket. Six months later, you check your account balances and find out that your Risk/Growth investments have taken off, and they no longer represent 60% of your total assets — it’s more like 75%. And now your Security Bucket holds only 25% instead of 40%. You need to rebalance!
In this case, your rebalancing action plan requires you to shift your regular contributions to the Risk/Growth Bucket into Security until the 25% is back up to 40%. Or you have to divert the profits or even sell some of the Growth/Risk investments that are booming and reinvest them back into bonds or first trust deeds or whatever combination of assets you’re keeping in your Security Bucket.

Clayton Christensen’s Innovator’s Dilemma

In Christensen’s 1997 The Innovator’s Dilemma, he writes about the kinds of struggles large companies have to compete with smaller and nimbler startups. One of the principles he states are that, “Small Markets Don’t Solve the Growth Needs of Large Companies.”

He goes on to say that, “To maintain their share prices and create internal opportunities for employees to extend the scope of their responsibilities, successful companies need to continue to grow. But while a $40 million company needs to find just $8 million in revenues to grow at 20 percent in the subsequent year, a $4 billion company needs to find $800 million in new sales. No new markets are that large. As a consequence, the larger and more successful an organization becomes, the weaker the argument that emerging markets can remain useful engines for growth… Small organizations can most easily respond to the opportunities for growth in a small market. The evidence is strong that formal and informal resource allocation processes make it very difficult for large organizations to focus adequate energy and talent on small markets, even when logic says they might be big someday.”

Can Managers Learn Something from the Stock Market?

In October 2015, Google announced it would create Alphabet, a holding company of smaller companies. “Our company is operating well today, but we think we can make it cleaner and more accountable.” The “accountable” is for the rate of growth that Christensen mentioned above.

As I had written in the past,

in 2015, Google reported $75 billion in gross revenue. Adwords (it’s core business) represented over 70% of that. To continue a growing at a 20% clip is tough, especially on a publicly traded company — where the street only cares about growth. So Google “rebalanced” itself to deliver growth to the street from it’s other units. This way it can satisfy the street and also compete with emerging startups.

Google’s buckets are no longer it’s ad business/core, but now consist of it’s investment arm, operating businesses, and GoogleX — it’s moonshots.

Being beholden to investors that only are seeking returns can be tricky and might make a company lose sight of emerging markets. By borrowing practices from other industries, it can satisfy it’s stakeholders, as well as deliver on it’s mission.

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