Risky Business

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Last week Nike released a very bold and courageous advertisement. Unless you were somewhere off in a silo, there’s no way for you to have missed the uproar and backlash the company temporarily received from consumers. Resistance of the company’s decision to highlight Colin Kaepernick’s message in their “Just do it” campaign ranged from lighting shoes on fire to boycotting.

Aside from my personal belief in why the resistance exists from a particular sector in our country, the truth of the matter is that when it comes to behavioral economics (the combination of economics or finance and psychology) there are some specific rules of thumb to keep in mind that will ultimately affect a companies performance: how product offerings are framed and the notion that individuals do not always base their consumption on personal preference.

While Money Issues does not offer advice on the latest, greatest stock picks. My intention with this blog is to shed some light on how consumer sentiment has an undeniable effect on the perceived value of a company and what opportunities that potentially translates into for investors.

Let’s explore these two concepts mentioned above in relation to the latest business decision of Nike and then we’ll have a clearer picture on how these decisions ultimately affect the company, its stock price, and investors.

Framing product offerings

If you happen to be a business owner then you are probably already aware of the depth of importance of how your product(s) are presented to your consumer.

Within the context of behavioral economics, it has been proven that the manner in which information is presented has a profound material impact on how consumers respond. Nike chose to frame their globally known message of perseverance without excuse through the lenses of a widely controversial athlete’s perspective: “Believe in something. Even if it means sacrificing everything.”

The presentation of their brand in alignment with Colin Kaepernick demonstrated a level of inclusiveness and allegiance towards the broad spectrum of what it means to “Just do it”.

Well, Nike Just did it and share prices dipped more than 3% on that Tuesday. The risk involved in that strategy walks the fine line of taking sides on a highly politicized issue, which seems to becoming more common these days – Delta Airlines, Starbucks to name a few.

I want what you want

Another theory behavioral economics proves is that individuals are typically influenced by the decisions of their peers.

Many Nike supporters turned their backs on the company last week based off of what we might call jumping on the bandwagon, or how they say in sports lingo – becoming a fair weather fan. However, Nike’s bold commitment to their mission and brand allowed them to capitalize on a sector of customers that this stance has resonated with.

Despite the 3% stock decline last week, online sales rose by 27%. Many finance industry analyst believe this to be risky, but without risks, there really is no great reward.

When it comes to investing in anything, a company – yourself – a friend – a child, there are inherent risks. We risk the possibility of losing. Losing some or even all. However, risk also has a positive correlation with a return. Meaning as risk increases, the potential for gain also increases.

The degree of risk that any individual or company is willing to take on is tied to three things: (1) personal tolerance (2) your goal (3) time horizon. How much risk are you personally comfortable with taking on in order to reach your goal until the returns are needed?

A high-risk investment, as in the case of Nike and Kaepernick, often do well in the long term because time mitigates the short-term effects of risk. While there were temporary setbacks from Nike’s decision, in the long run, consumers will remember the risk the company took in remaining faithful to their brand message.

You may have questions about when is the best time to invest, I would encourage you to just do it. Investment in the stock market should be framed around the long-term; if not for anything else besides compounding. The earnings your investments produce are reinvested and have the opportunity to earn even more.

Nike gets it. Just do it.


Photo Source: Nike Advertisement

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