For the past 20 years or so, the trading prowess of Goldman Sachs has generated billions of dollars in profits for the firm. As long as the trading group generated profits, investors were happy to own the stock. The last few years, Goldman while still generating profits, does not make them as easily as in the past. In an article by Matt Scuffham and Elizabeth Dilts Marshall of Reuters, two years ago, Goldman told investors it would find new ways to generate $ 5 billion in revenues.
For most companies, generating $5 billion in new revenues would be a very ambitious plan, Goldman thought they could easily do it. It turns out, it is hard to do even for Goldman. After 2 years into the strategy, new targets are to be set by Chief Executive David Soloman.
The best method to achieve new revenues is buy a company which generates that income, however Goldman tends to do things in house. They started a retail bank, but retail deposits do not generate great income. Goldman was trying to be more diversified as regulations changed, trading profits tend to be cyclical with highs and lows, and competition increases.
Linking to dividend paying stocks, all companies are dependent on a couple aspects of their business to generate the bulk of their profits. There are other areas to generate income, but the senior management tend to come from a couple of divisions. In the above example with Goldman,it is very difficult to be diversified at a level Goldman needs to be to offset its trading income. With your investments, are you really diversified or heavily oriented towards a couple of sectors? If you are, as long as you know where the profits are coming from and if you see changes you can find other alternatives, you are doing okay.
There are more questions than answers, till the next time – to raising questions.