1st August 2012
I love innovation. My entire career has been spent in technical innovation. Even now I'm trying to replace the need for cash and credit cards by putting them on a cellphone. But as an investor, innovation sucks.
Unfortunately we're attracted to innovation like a moth to a flame. You can just see the bucks going up in smoke.
Innovation has two very nasty effects on investors. The first one is that it gets everyone excited, often over-excited. It's possible to trace most of the great booms in stockmarket history to the over-enthusiasm of investors for some new technical trend.
In the mid-1800s the great railroad boom made mass travel for the masses a reality in England and opened up the great American wilderness. Railroad stocks boomed, but most investors lost money when not enough people were able or willing to pay for the use of the new networks. Yet the railroad revolutionised many other industries, allowing producers to be sited away from consumers, and creating previously unheard of economies of scale.
In the 1920s the twin inventions of the automobile and widely available electricity led to a boom in associated corporations. A cycle played out in which common enthusiasm for these trends led to overinvestment, a stockmarket boom and an inevitable crash. The Wall Street Crash.
And, of course, in the 1990s the internet boom caused a similar cycle. Yet we can see today that there were many opportunities – they just weren't where people thought they were. The internet is even now revolutionising publishing and IT industries of all kinds: digital publishing is destroying the old distribution channels and widespread high-speed broadband access is making outsourced cloud computing facilities a viable way for many new business to start trading.
This is the second way in which innovation is a bane to the investor: it destroys existing, often long-established, business models. This process of creative-destructionism usually, eventually, leads to simpler, better ways of organising corporations and lives. But in the meantime all of those careful investment plans, built on careful historical analysis of sales and earnings can go hang.
So, yes, I love innovation personally. But as an investor I'd rather find something which is more likely to stand the test of time. Powerful brands and physical goods are harder to displace. Although even there you can never tell … (see: 3D Printing is Not Exogenous).
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