By Jean-Philippe Legault, guest contributor

To succeed in the stock market, an investor must read a lot. He must read financial statements, research reports, reports on multiple industries, transcripts of conference calls, news, biographies, magazines, etc. However, I believe that an investor should take the time to digest all this information by setting aside time to reflect without distraction.

For me, these periods arise when I walk my dog in the evening. These quiet moments allow me to reflect on our portfolios and the stocks we follow. An exercise that I like to do is to imagine what our companies will look like in ten or twenty years. To achieve this, I seek to understand how the industry in which they operate will change. In my opinion, there are two main phenomena that dictate the transformation of an industry, convergence and divergence.


Convergence occurs when one or more industries merge together. Let’s take the example of the smartphone industry. If you have such a device, you will notice that it combines several features. To name a few, they are phones, cameras, payment systems, and navigation systems. When you take these features individually, you realize that each belongs to its own industry. There are a multitude of players in each of these industries. However, the arrival of smart phones has made it possible to create convergence in a single product. An investor’s job is to identify whether a company will be positively or negatively affected by convergence.


Divergence occurs when an industry specializes by developing sub-industries. Consider the restaurant industry. The concept of divergence has led to the emergence of specialty restaurants such as French, Italian, and Chinese restaurants. Divergence can lead to even more precise specializations. Think of pizzerias. Domino’s specializes in delivery, Papa John’s in the quality of ingredients, and Papa Murphy’s in the concept of pizzas to take away and cook at home. An investor’s job is to try to determine what divergence will look like in an industry.

Simple, But Not Easy

The distinction between convergence and divergence is rarely clear or precise. Take the case of the banking industry which, in my opinion, is affected by convergence. Banks offer, among other things, loans, wealth management and insurance, all industries that exist individually. However, I believe that the phenomenon of divergence also exists in this same industry. A bank like SLM Corp. specialized in student loans, while a bank like goeasy specializes in non-prime consumer loans.

Now imagine that you have a traditional loan and deposit bank in your portfolio. Your research and reflection work therefore consists of determining the forces of convergence and divergence that can potentially operate in this industry. Will this bank lose market share because the industry is converging towards a complete banking offer, or will it be affected by an overspecialization effect? Both are likely, but one of these forces is likely to take over the other. Ultimately, it will be consumers who will dictate whether convergence or divergence better suits their needs.

In closing, understanding these concepts will allow you to assess the company’s strategy based on the forces operating in the industry. Reflecting on these dynamics is certainly a stimulating exercise.

This blog is my last for the summer. Next week, Philippe Le Blanc will resume writing his weekly blogs. Thank you and see you soon!