What Graham meant was that investors often let themselves be seduced by a new industry. They vote for such stocks by buying them. The fact that a company’s actual business prospects may not in any way be related to its mass-market popularity is forgotten, or perhaps never even fully addressed or analyzed in the first place. The stock market just isn’t a trustworthy machine to tell you the true value of a company over short periods of time–though it will always clue you in to what’s popular at the moment.
But over the long term, the market has to value companies solely by their “weight”–profits the businesses can generate on a sustained basis. A company that does not start earning money can’t stay popular for very long. Last year–through about April–many starry-eyed shareholders were entranced by all things that could be categorized as New Economy. By the end of the year, however, many of these publicly traded businesses had revealed themselves to have as much weight as Ally McBeal.
The euphoria was understandable. A lot of new and exciting technologies are being created, and it was predictable that many investors (especially ones new to the market) would equate breakthroughs promising to alter “life as we know it” with a path to quick riches. The two concepts don’t necessarily go together.
For years, Warren Buffett (a disciple of Ben Graham’s) had been urging irrationally exuberant investors to look past the glitz of technological breakthroughs, and to gauge the true likelihood of picking a specific long-term winner. There have been more than 2,000 carmaking start-ups in this country since the first U.S. patent for an automobile in 1895, and the industry changed society irrevocably. Yet only three major U.S. auto companies survived. Make that two and a half, with Chrysler now under Daimler.
The same history has been played out in the radio, television and airline industries. All these society-transforming technologies collectively produced hundreds of start-up companies and millions of enthusiastic investors–yet provided extraordinarily few long-term survivors, and modest returns to investors even from the eventual winners. In a 1999 interview, Buffett said: “As of 1992, in fact–though the picture would have improved since then–the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.” That’s more than 80 years of a revolutionary technology adopted enthusiastically by the masses–but unable to yield returns to investors.
In 2000 we all had the opportunity to see close up and in a compacted time frame how history has a nasty habit of repeating itself no matter how much we all agree to collectively engage in a little societal amnesia. Most dramatically, investors’ reversal of fortunes occurred with “Internet” stocks–or “laughingstocks,” if you’re feeling a little mean. With the Nasdaq composite index down a whopping 39 percent over the year 2000, and the number of cash-strapped Internet companies announcing layoffs piling up daily, by the end of the year it was easy to see that the weighing function of the market was overwhelming the voting component–as it always does, and always will over the long term.
All of which is not to say that the various emerging technologies don’t offer exciting investing opportunities. They certainly do. It’s just that it takes much more to be a successful investor than to be the last judge in a popularity contest. To succeed where others are going to fail, it takes doing some real homework before others beat you to it.
In the pages that follow, we offer a brief look at three New Economy sectors: online retailing, wireless service providers and biotechnology-materials companies. The three sectors might be thought of as representing the past, the present and the future of hot industries. After all, it seems that online retailing, as recently as a year ago thought to be the wave of the future, is going to go down in history mostly as a graveyard of lost investor cash. It turns out that nobody was exactly suffering from not having enough stuff to buy before eToys came along to sell us birthday gifts online at 2 a.m.
Wireless phones, meanwhile, are soundly embedded in many people’s daily lives today and promise to become more and more relevant all the time. Wireless service providers are in the business of improving people’s communications–something of deeper meaning and utility than all-stuff-all-the-time.
Biotechnology, meanwhile, is a market of the future. By virtue of being in the business of extending life itself, biotechnology is the highest-potential value creator of all three industries. A longer life is something almost everybody is willing to pay for. Successful drug manufacturers have always been sound investments, though identifying the eventual winners in a nascent industry is quite challenging.
While at any given moment the market may weigh the companies offering technological breakthroughs on their gee-whizness (“Gee whiz! This is going to change everything! I’m buying!”), over the long term any stock will reward its shareholders only if the underlying business is sustainable. What follow are some starting points for framing further research on industry prospects, and the risks and rewards of attempting to select given companies that might prove to be worth owning over the long haul.
Overview:Page 58Wireless:Page 60Biotechnology:Page 63Fools’ errands:Page 65Online retail:Page 66
