Friday, July 7, 2017
The Three I's of the Business Cycle?
Is Warren Buffet right about business cycles? Perhaps.
Some recent articles have quoted Warren Buffet, the "Oracle of Omaha" as saying that each business cycle comprises Innovators, Imitators, and then Idiots. Using the Real Estate Bubble of 2008 as an example, the Innovators, such as myself, saw opportunities in the market back in the 1990's, when prices were low, foreclosure sales were flooding the market, and a positive cash-flow was possible from the get-go. We sold out near the peak of the market and made a lot of money.
The Imitators, such as some friends of mine, bought into the market in the late 1990's and early 2000's, after seeing how Mark and I were making money at "this Real Estate Thing." They did OK, but they paid much more for properties that we did. The smart ones got out in time. Those who hung on past the bubble ended up breaking even - doing OK, but not making any money.
The Idiots bought at the height of the market - after the media was reporting how "this Real Estate Thing" was really exploding and the Idiots believed when people on television said it was going to go higher - perhaps even double in value - much as gold and Bitcoin prognosticators say when those commodities hit a peak. When people on television tell you something that has already skyrocketed is going to skyrocket further, it is time to get out. And after the 4th of July, you should have an idea how skyrockets work. When they reach their apogee, they don't jump up yet again - they go down.
I knew some Idiots. They bought at peak value and never even bothered to rent their properties. In a way it made perverse sense - they were just going to go bankrupt anyway, so why bother? They bought high and
sold low went bankrupt and then complained that the "government should bail us out" because "everyone else made money, why not them?"
Ahhhh, the dream of Free Ponies. So beautiful, we cannot let it die!
The Real Estate example illustrates Buffet's point. But it is not an inflexible rule. First to market is often last in the marketplace. In that regard, the Imitator can sometimes be the real winner, and the innovator and the idiot come in last. Boeing trumped DeHavilland. The PC swamped Apple. Facebook succeeded where MySpace failed. Sometimes it is best to hold back at least a while and see how things play out. And maybe Elon Musk should keep this in mind. He created the market for the Lithium-Ion powered car, at least as a luxury item. But other car makers have jumped on the bandwagon, and in the future, they may take the larger part of market share, if electric cars succeed in the marketplace, which they eventually will. Timing, of course, is everything.
But there are other situations where the Innovator is an Idiot, and Groupon comes to mind as an example. And lately there are a lot of innovating idiots in the marketplace, with business plans that make no sense and do little else but hemorrhage cash - with no prospect of profits, ever. We have companies like Twitter that never make money. Or ideas, like Groupon, that really made no business sense for the company itself, or for the merchants who offered the "groupons" to consumers. Not only did it turn out to be a fad that faded fast, every other online merchant jumped in and offered similar deals.
We have a lot of "tech" today that is not really "tech" but really more of business plans on the Internet. And the Patent Office and the Courts are starting to recognize that these "methods of doing business" are not really patentable as they are not really inventions, per se. They are just ideas of setting up a business - no more unique or interesting than a lemonade or fireworks stand. But you tie it to "app" some people believe you have a "new technology" that has a "market cap" greater than that of Finland. It just isn't so, and the people who "invest" in these things (by purchasing the IPO stock, not the venture capitalists who sell the stock) are the Idiots in this scheme.