Where do you stand?
Innovation impacts you as an investor more than you think. Disruptive technologies are constantly trying to become the next big thing, and Mr. Market is relentlessly keeping an eye on them, ready to cash in on yet another ridiculously overpriced IPO (Initial Public Offering). You, the investor, are unfortunately standing in the middle of it. The noise of the market can become too loud and your emotions can take you down the wrong path. Historically innovation’s return on investment has been priceless, going from saving lives to feeding the hungry and enhancing the well being of everyone on this planet. On the other side, investors who invest in innovation throughout the history have not seen great returns. In fact, they would probably be the one to warn about risks involved in taking on that task (Don’t get this wrong- rewards can be enormous, but the fact is the stats are not in your favor).
Let’s talk about the car industry. Back in 1895 there were only four cars officially registered in the U.S. Little more than 20 years later in 1916, 3,376,889 cars were registered. Over 2,000 companies emerged and investors, entrepreneurs went into the car making business. The auto industry’s impact on human lives was immense, and it probably represents the greatest inventions in the first half of the 20th century.
Would you want to be there?
If you think about that time, does it sound to you like a place to be? “Perhaps”, you might be thinking. Keep in mind that out of all these auto companies, only 3 survived! Let’s go over that number again. Out of 2,000 companies- only 3 survived. They were known as a “Big Three” back in 1960’s. To honor all those 1997 companies who didn’t make it, you may visit their Wikipedia page if you wish to say a few last words. Even though a car was one of the greatest innovation in early 1900’s, had a huge impact on America and was the definition of disruptive technology; it failed to do one basic thing that you as an investor should be concerned with- give you a solid return on investment.
You think it was really hard to pick winners back in early 1900’s? You bet. It was much easier to pick losers. If you knew what was going to happen, you would be shorting horses and getting very rewarding results.
Fly High, Pay Low
If our car industry story wasn’t compelling, the stats are no different for the airline industry which is, by the way, another disruptive technology that changed the way we live. From 1919 to 1939 there were about 200 airline companies in the U.S. As you imagine today we can count about a dozen of them, not to mention that the domestic airline industry has reported a negative net income in 23 of 31 years since deregulation (1978) and a strongly negative aggregate net present value of earnings. Let’s not forget that at the end of 2009, the entire book value of U.S. passenger carriers’ assets was about $163 billion and the book value of shareholder equity was $10 billion.
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The point is that airline industry, the car industry and many others produced incredible life enhancing benefits to everyone around the world, but investors. This is something that you as an investor need to keep in the back of your mind at all times. If you are willing to take on that risk, great, but remember that stats are not in your favor. There is nothing wrong with taking on a growth type of a company and hoping to discover it before everyone else does. Even Warren Buffet takes on challenges of that nature from time to time, just because he can ( Let’s not forget how Warren started- very defensive, price sensitive approach at all costs). Berkshire Hathaway owns 10% of a Chinese electric car maker BYD, who’s stock recently plunged about 47%. We also know that Berkshire lost a ton of money in Tesco- which Warren himself called a “big mistake”. Mistakes will be made, so don’t stress about it too much. Remember that stocks on average lose money 1 out of every 3 or 4 years.
The approach that seems reasonable is that you develop a portfolio that is somewhat conservative and that offers a fair return. Keep in mind that a fair return translates into something between 6-10% and not 20-30%. Your investing strategy matters a lot, but your overall goal is to:
Minimize the overall risk
Leave some room for riskier and growth oriented stocks
Make sure that if No.2 goes south, your portfolio is still profitable