27th October 2011
For the circle of corporate birth and death is faster than ever before. And investors have to be fast on their feet if they're not to be stuck with last year's or last week's big thing.
Who remembers social media sites Friends Reunited or My Space other than with nostalgia although despite having lost backers the best part of a billion between them, both are still with us even if admitting to using them is social Siberia.
But with that mortality in mind, who can say with total certainty that today's hot social media numbers such as Twitter, Facebook, or LinkedIn will still be predominant, or even still with us, in five or ten years' time? Apple is top dog in technology. Not long ago, that crown went to Microsoft or Nokia. Who will be next? We've been through web 2.0 and its variants. What will web 3.0 look like?
It's not just the world of clicks. In bricks, the high street has lost Woolworths, MFI, Threshers, Borders and countless other names. And looking at current share prices, investors are not all that convinced that retailers such as Blacks Leisure (LSE: BSLA), HMV (LSE: HMV), or Clinton Cards (LSE: CC) will still be with us in their present forms after the New Year.
Fund managers and individual equity buyers now have to deal with shorter periods between birth and death than previously. Fashion changes more rapidly than ever before – and not just in clothes. Possessing last year's must-have gadget this year is the social equivalent of a one-way ticket to Nowheresville. Listing yourself on a timeworn social website is the easiest way of ensuring an empty diary.
Where once there was permanence, there is now impermanence. There are two secrets to using this for investment advantage.
The first is spotting where a firm in on the birth to death cycle – this is not far distant from Shakespeare's Seven Ages of Man.
Start with conception when the idea is merely a glint in some proud entrepreneur's eye. No one is committed other than the parents. At this stage, the foetus firm is probably housed in a geek's bedroom.
Then aspiration where the idea gains some flesh and initial investors are invited in.
This is followed by entry where the firm starts trading and less entrepreneurial investors take an interest. This stage may often see the fastest growth in percentage terms although the company will still be young and flexible.
Then growth – this is where the company comes to the attention of the public and to the bankers and brokers who want to take it into the public equity arena. This may be the moment of maximum returns – and the chance for original backers to move out at a big profit via an initial public offering or IPO.
The stock market history of technology is littered with companies whose apogee coincides with their equity launch or in the days shortly after. Investors who come in with the IPO have to time their exit carefully. While there are some examples of firms which have moved onwards and upwards, the overall history of investing in IPOs is less than exciting. The linkedin share price more than doubled in a few days earlier this summer to $122 – a price never since seen.
But some investors will see consolidation where a firm moves into a less volatile phase, even perhaps paying a dividend. Lucky shareholders will profit from takeover bids from outside or see the firm move into a new dynamic, perhaps changing its business model from within.
The second secret is the old stock market adage of leaving something for the next person. You can't spot peaks in prices so don't even try. Don't be greedy (even if it is tempting) so if you have made a good profit, stick to it.
Less lucky investors will see the firm freewheeling downhill, a stage sometimes marked by high executive rewards (or even the corporate helicopter). This is a form of decay.
This is usually the last chance to exit the equity with any chance of recovering risk capital before the insolvency practitioners move in with the eventual death.