Quarterly Newsletter April 1, 2015
In Life on the Mississippi, Mark Twain tells of thriving 19th-century towns booming with riverboat freight and passenger traffic, that suddenly found themselves stranded – and ruined – when the mighty, meandering, unpredictable river flooded, and the channel made a short cut across a loop, moving several miles away and bypassing the little town completely. Overnight, they were out of business.
Similar calamities can happen in the corporate world. The Eastman Kodak Company had proudly dominated the film-photography business for over a century, but digital cameras swept it all away in a shockingly short time. Actually Kodak had been experimenting with digital imaging, but perhaps were not eager to push it because they could see the mortal threat it posed to their lucrative film business. The thousands of patents guarding their chemical processes were powerless against electronic competition which didn’t involve chemicals at all. That an established industrial titan could be so quickly taken down by developments unforeseen a few years before, is the main reason that prudent investors diversify their holdings. No matter how well-entrenched a company may seem, we can never know what the future will bring.
A constantly evolving economy brings both hazards and opportunities for investors. We all try to look at our world realistically, but the batting average for prognosticators isn’t very high. Many new situations sort of creep up on us quietly, like the gradual disappearance of a favorite childhood candy, or the realization that we can’t look up a friend’s number in the phone book anymore. Years later we wonder why we weren’t able to see the change coming and take advantage of it somehow.
Many, perhaps most, investors find major change exciting, searching for ways to climb aboard the Next Big Thing that comes along and ride it to riches. On the other hand, being in a business that is profitable and not changing can be a good thing too — it’s what Kodak enjoyed for many years. Renowned investor Warren Buffett usually tries to steer clear of change, avoiding technology in particular, because rapid innovation makes it hard to see what the competitive situation will look like five or ten years ahead. Buffett makes big investments and wants to hold on for a long time. He looks for enduring businesses where profits are high and change minimal…..as close as he can get to a sure thing.
Every day we study the news, and always there are questions – some easy and some hard. Most of them contain the seed of a business/investment idea for the right person.
- Roughly twenty-five years ago, we bankers got computer terminals on our desks for the first time. Will people still be using desktop computers in the future, or will everything be on a smartphone or pad? Already the time, alarm clock, calendar, weather, camera, GPS locator, stock quotes, games, and a lot more, are on your mobile device. If the desktop PC goes away, and the laptop, what will that mean for Microsoft, Cisco, Hewlett-Packard, Intel, et al? Can they adapt? And how will the smartphone itself evolve? Someday all of our coolest tech toys will be in a museum of ancient artifacts, next to the slide rule, the lead pencil, and the abacus.
- Energy is a huge business, vitally important to our economy. Coal, oil, and gas power are absolutely necessary now, but how will things look in ten or twenty years? Apple just invested $850 million in a California solar farm and now is talking about electric cars. Are they crazy? Not usually. But that’s a big leap from making phones.
- This is a terrifying time for retail stores, with more and more sales being done online. On the website you never meet a salesperson; the only question is whether they have the product you want, and the price. You can shop in your jammies if you want to, in the middle of the night. Amazon started out with books; now they will sell you almost anything. The recent bankruptcy of Radio Shack, founded in Boston in 1921, shows how hard it can be to move to a new business model. What is the future of retailing? Are stores and shopping malls obsolete? What about car dealerships? What about bank branches?
- Many young people today do not find it worth their while to read a printed newspaper. In the future, how will people get their daily information, and who will control that information? It may be “free”….but will it be true? And will differing views be there to challenge it?
- Sad to say, armed conflict seems to be a permanent feature of human existence. The technology for killing people develops rapidly; our diplomacy and morality, not so much. How will wars be fought in the future? We already have the ability to incinerate a Taliban vehicle in Afghanistan, using a drone guided from a comfortable office in Nevada. The U.S. now has nukes and drones and the bad guys don’t, but that advantage will not be ours for long. Could drones be used to prevent wars, as well as fight them?
- Will electric cars replace gasoline-powered, or are they just a passing fad? The Leaf, Volt and the beautiful Tesla do not pollute, but get their electric charge from a power station many miles away…..which maybe does pollute……Hmm.
- How about self-driving, self-parking cars, guided by GPS? Most of the needed technology is now available. And who will be liable to pay for damages in an accident, if nobody was driving? Ha! Now there’s a fine puzzle for the lawyers and insurance underwriters to wrestle with.
- Putting children through college is a crushing cost for families, yet there is no guarantee that the graduate will land a good job. Meanwhile, specialized courses are readily available online at a fraction of the cost of living on campus. Many jobs do not truly require a college degree at all, if the person learned well in high school. Is higher education pricing itself out of the market?
- Our economy can hardly function without privacy and protection for sensitive personal/financial information. Every week brings news of another major invasion of some retailer’s or bank’s database, spilling information affecting millions of customers. We can’t go on like this. How will “hacking” – the wholesale plundering of online data – be brought under control, before the internet loses its utility?
- Can truly affordable health care actually be provided to the general population? Could Wal-Mart deliver babies for $99, if they were allowed to do it?
- People have enjoyed drinking beer for hundreds of years, all around the world. Guinness dates back to 1759; Stella Artois to 1366. Will we switch to some other beverage for celebrating our good times? It could happen, but probably not.
- People want to be clean, look their best, and live in a clean home. Increasing millions of people all over the world use soap, shampoo, toothpaste, razors, paper towels, toilet paper, etc. every single day. Will this soon change? Probably not.
- Many places in the world are beastly hot and humid, unless there are showers and air conditioning (Try Memphis, in August). Once people experience comfort, will they give it up and go back to sweltering? It seems unlikely.
- Ignoring experts who exhort us all to ride public transportation, people love the independence of having their own set of wheels. With a car, we can go where we want, when we want. Are we likely to give up that freedom and travel by bus? Not if we can help it.
Old advertisements for Dewar’s White Label whisky show a heartwarming picture of a Scottish glen, a trout stream, or a rural cottage, with the caption “The Good Things in Life Stay That Way.” Well, it’s a comforting thought, but the truth is that some good things stay that way, and some don’t. In this great country of ours, there are more ways to make money investing than you or I can imagine. We only need to own a few.
– Written by George Donner