GameStop: a study in survival

Analysis is the easy part of investment. Sure, it's the area that get's all the attention and, from the outside, it looks hard but I'd wager more people have lost money by poor thinking and psychology than by poor analysis. I know I have.

The lesson I was taught early was this: to become better investors we simply need to do it more often. Invest your money, make mistakes and think about the lessons.

That is a sure way to improve but also a sure way to get poorer. A cheaper alternative is to read business case studies. The share market isn't about trading or investment as such: it's about business. The more we can learn about business the better we get at investing.

One interesting case study I came across recently is the case of GameStop, a US based retailer of video games.

If you asked me five years ago where this business would be, I would have said, without hesitation, bust. Surely video game retailers would join retailers of music, DVDs and books in the grave. Yet GameStop has flourished in a declining industry even as peers have fallen.

This article in Bloomberg Businessweek tells the whole story and is recommended reading.

The lesson in this case is to peer deeper into business and identify their true strength. The strength of GameStop is its used games business which acts as a defacto currency to lower the price of new games and consoles, gives customers reasons to return and generates generous sales margins in its own right. Sourcing and selling used games also creates a hard to replicate network effect which insulates the business from discounters like Wal Mart. GameStop isn't without problems but the fact that it is still around is worth reading about.