Some weird tidbits in the news lately and things coming across my desk made me think about why some companies go bust while others carry on.
The trolly companies and passenger railroads went broke - and were bought up by the government - when people stopped using these services. While we like to be romantic about these older forms of transport (and some folks think our tax dollars should be spent to bring them back) the reality is, people preferred their cars - and airplanes - over these slower and less convenient forms of transport. The great ocean-going liners were similarly displaced by new technology and new patterns of consumption. The jet age killed the great liners - and the railroads. People voted with their feet - and their pocketbooks.
Thirty years ago, we all had big stereos in our living rooms - and paid dearly for them at the local stereo store. Today the store is out of business. People have "surround sound" systems or listen to iPhones through beats headphones - which itself we were told was a billion-dollar "empire." I wonder what ever happened to that? I mean, that was like almost ten months ago, right? Did Apple overpay for headphones? Isn't that a pretty competitive business?
Abercrombie made news recently when its iconic CEO (worst.facelift.ever!) stepped down - as sales slump in its mall-based stores. I hate to admit it, but Mark has two Abercrombie shirts and a hat - all bought at garage sales for about ten cents each. From $70 trendy mall costume to garage sale fodder. Now appearing on a homeless person near you! That's how styles are - this is not some weird or unusual thing. Seen anyone in a Benneton sweater lately? Of course not.
The same is true for nearly every other industry - even industries that are monopolies. When someone exercises monopoly power, people often seek other technical solutions - even if they are less efficient. The wood-burning faithful don't spend half their lives cutting and stacking firewood because it is cheaper, but rather because they dislike paying money to a monopoly energy provider
The question remains whether the iPhone will be obsoleted by yet another product, down the road. Already the smart phone market is voting Android over Apple by a factor of 2:1 - and rising. Yet for some reason, no one identifies the market for smart phones with Google. To be sure, there is a style factor with Apple, as people like to show off their expensive phones (the gleaming Apple logo tells others you can "afford" to pay extra for an Apple product).
But there may be trouble already on the horizon for Apple. Sales of the iPad have tapered off in recent months. Analysts offer a number of reasons why. First, everyone who wanted one, has one. Second, you can buy a Droid pad for as little as $99 - or about 1/5th the cost of an Apple pad. Third, since most pads are not tied to a phone contract, there is no incentive to "upgrade" to a new pad at the expiration of every phone contract, as many phone users do (not realizing that their phone upgrade is not "free" but rather folded into the cost of the monthly phone service). Fourth, since you can't put your pad in your back pocket, it doesn't break as easily as an iPhone.
In order for Apple to continue to succeed, it has to be able to sell its phones for more than double the current market value for non-Apple smart phones (which have similar, and in some cases, superior features), or like when the iPod faded, come up with the "next big thing" to sell when the existing product sales start to dwindle. As noted in a recent article about iPods, the cost of an iPod today is actually less than it was back when they first came out. Once a product becomes a commodity, the best you can hope to command is commodity prices.
And over time, I think the same thing will happen to iPhones as well. These are commodity items, and no longer able to command monopoly prices. Unless Apple can come up with another 'must have' product, they won't be able to generate the kinds of profits necessary to keep the share price where it is right now. As I have noted in the past, Apple's business model is premised on each product being a home-run out-of-the-ballpark hit. Apple's competitors need only make a base run hit or at least not strike out, in order to survive and prosper.
For other companies, which are selling even more ethereal things than cell phones, the problem is even greater. Website-based companies like Facebook, Groupon, Linkedin, Twitter, and the like, are all based on the idea that the site is popular and that people will continue to find the site in style and not migrate to another site which may be more in style or trendy. Again, recent trends in Facebook users are somewhat alarming in this regard, as the site is losing teen and 20-something users and gaining over-55 users. In terms of trendiness, this does not bode well. Facebook is going from "hip" to "hip replacement surgery".
For the small investor, this all seems very confusing. After all, the media talks all the time about Facebook and Apple. In fact, they seem to talk about nothing else. And if you go online to most financial websites, what do you see? Share price and not much else. Things like earnings and dividends are not deemed to be sexy, and if you see stock data for a company, usually these things are not displayed on the main page - but on subsidiary pages or "research" pages you have to load separately. The stock analysts talk about nothing but share price - and whether it will go up or down. The underlying picture is often obscured by a lot of happy talk.
Yes, it is possible to make a lot of money in stocks by speculating. It is theoretically possible to make a lot of money gambling in a casino, too. In reality, of course, if you sit in a casino long enough, the law of probability states that you will eventually gamble away all of your money. And I believe the same holds true for stock speculating as well. You can gamble on a share price going up, (or even on it going down, with options trading). But unless you have some inside information (which is illegal) stock-picking, with the idea of making money on variations in share price, is mostly gambling.
This is not to say that buying individual stocks is always a bad idea. When I started out investing in stocks, I was like most people, watching the television and worshiping at the altar of the almighty share price. I listened to the financial networks and the financial pages and bought stocks based on their comments and advice. But a small voice in the back of my head kept saying, "Gee, everyone else is getting this same advice - how can this be a good way to invest?"
And since then, I've learned to listen to that small voice.
As it turned out, stock picks were the exact wrong way to go. When a company was mentioned in the news, the plebes like me would go out and buy it. The next day, the stock would rise, and we would all congratulate ourselves on being smart investors. Hey we must know what we're doing, right? After all, the credit card company just told us how financially solvent we were by offering us a $10,000 increase in our credit line (at a low, low 18%, right?).
But over the long-term, many of those stock picks turned out to be anything but winners. Why was this? Because I didn't understand the fundamentals of the underlying business - but was buying based on share price and hype.
Let me give you an example. Cemex is the Mexican cement company, and about a decade ago, I bought this stock after hearing a "stock analyst" on television (I think it was Fox News, no less) saying he thought the stock was "going places". Apparently the toilet was one of those places.
The stock did take off - after all, when millions of plebes buy, the price goes up. The law of supply and demand takes hold. But then a funny thing happened - the stock tanked. Why was this? Well, as it turns out, the cement business is a commodity business. Every local town and city has a cement plant, and the competition to make cement is pretty fierce. You can't corner the market in cement, and Cemex found this out the hard way.
Of course they are still in business and you see their trucks around sometimes, but in retrospect, there was no real "there" there - just a regular commodity business, subject to competition (and the economy) and no real reason to justify a jump in share prices. Today, the company has a negative EPS - which means it is losing money. From media darling to dumpster, all in about five years.
I learned from that mistake, and stopped listening for "stock tips" and instead looked for companies that were in it for the long haul. Instead of looking for "the next big thing!" in terms of some stock that was supposed to "take off!" I looked instead for regular, dividend-paying stocks from companies that had a good track record, a sound business plan, and a decent product that looked like it might stay around for more than 18 months.
And over the years, this portfolio has done well. With the dividends accumulating every year, I buy another stock, further diversifying the portfolio, so I am not dependent on one stock making it big - or going in the tank. Do the stocks go down? Well they sure did in February of 2009 - even as they paid dividends all the way down. But these profitable companies were the first to recover and prosper.
Of course, this is not to say that dividend stocks are the only thing to invest in. Invest in a number of things, and over time, you'll make money. Invest only in one, trendy, thing, and over time, you will likely go bankrupt, unless you are one of the lucky few who picks the right "thing" and also knows when to sell out in time.
But with so many factors working against them, it is amazing that any company these days stays in business for very long. Because over the long haul, it seems, every company goes bust, eventually, as the times change, styles change, the legal environment changes, and competition levels the marketplace.
Stocks are not forever, as many folks like to say. But then again, they should last longer than a year or two. Short-term trading is not investing. It's just gambling.