Wednesday, October 26, 2011

A Luddite Portfolio

Radio was supposed to kill newspapers, as were newsreels, slick magazines, television, and the internet. There was even a short-lived attempt to replace newspapers with fax machines. If we start from the Fessenden broadcast, the industry has been dying for ninety-five years and in that time any number of fortunes have been made publishing the damned things.

One of the memes we've heard ad nauseam in coverage of the Netflix story is that in order to survive, a company has to rush forward and grasp the future and divest itself of any vestiges of the out-of-date. This concept of CEO as bold futurist has great appeal, both for businessmen and business writers, but does always jumping on the latest technological bandwagon really work as an investment strategy?

Certainly, investing in cutting edge technologies can yield great returns (so can a winning lottery ticket), but it is by no means a sure bet. There are plenty of examples of innovative technologies that never went that far (the Teletouch transmission and the 8-track come to mind). There are also cases of old technologies that seem destined for obsolescence only to reinvent themselves (how many people in 1950 thought radio would remain viable a half century into the television age?) or that manage to survive as a niche product (did you know that you can still buy vinyl records at Target?).

A very good argument could be made that business writers get overly excited about the next big thing and since buzz can certainly pump up stock prices, there could very well be an undeserved premium on stocks associated with up and coming technologies. That would mean that the Luddite, by avoiding those overpriced stocks, could well have an advantage.

At the very least he would probably have unloaded Netflix when the CEO started talking about moving past DVDs, rather than waiting for the company to start to implode.

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