Everlasting Trends
It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usu-ally goes lower.
—WILLIAM O’NEIL
Despite all our technology and progress, human beings are wired rather simply. The physiological hu-man needs (as described long ago by Maslow) have created the best (most consistent) investment groups of all time: Breathing, Sleep, Food, Water, Sex, Sleep, Homeostasis (living longer), and Poop (waste).
Information technology is a category that sticks out beyond the base of the Maslow hierarchy, but it has been one of the most powerful and profitable everlasting trends.
I keep an eye out for companies that fit into certain categories of these trends. Companies that do the best job within these categories will also do best in the stock market. To me, the key categories are:
1. Information: Knowledge, Power, Leverage
2. Vices: Tobacco, Booze, Gambling, Sex
3. War and Defense
4. Health, Wellness, and Vanity
Here’s a close-up look at each category:
Information
We are addicted to information at a time when it has quickly become a commodity. The Internet, like the telegraph, telephone, railroads, and airplanes, has shrunk the world. Thomas Friedman’s book The World Is Flat is an excellent read on the power of the shrinking world. Google has been the recent information company to shake things up and has profited like none in its past. Information is not a commodity if it is organized and delivered fast and distributed where you need it. For their ability to manipulate and organize data, Google (as of January 2008) is now worth more than Ireland, closing in on Exxon, and worth about the same as Berk-shire Hathaway. That’s big. Google could buy the New York Times, the Wall Street Journal, and several hundred-year-old companies and still have money left over. How did that happen in ten years?
Why Google Trumps Microsoft on the Web, Even if Microsoft Buys Yahoo
Scott Karp, a professional blogger, has a good explanation: “Google is a web-native company.”
The main problem with Microsoft and Yahoo, looking forward, is that they are not Web-native companies—they rely on centralized control models rather than distributed network models, thus they are not aligned with the grain of the Web, which is fundamentally a distributed network. Microsoft does not have it and Yahoo does not have it. And if they merge, they still won’t get it.
Microsoft and Yahoo rely on software lock-ins (Windows, Office, IM clients, Web mail) to maintain their user bases—but without distributing any of that value to the network or harnessing the value the network would give back if they did. As such, they do not benefit from network effects, which is precisely what powers Google—and why Google will likely still beat a combined Microsoft/Yahoo.” Google has it. It’s in their DNA. It’s the Web.
Jeff Jarvis, another successful Web writer who has discussed the difference between Google and Yahoo many times, says it is difficult to change traditional media business thinking. What drives the success of Google and other Web-native compa-nies is completely counterintuitive to the perspective that drove the media business before the Web. Media used to be about tightly controlled silos; now it’s about loosely affiliated, distributed networks. Legacy business can, potentially, evolve and survive, but only through a radical change in thinking.
The future of media belongs to Web-native companies—particularly those who can innovate Web-native business models. That’s what Google did with AdWords, creating a liquid market. Above all, the future belongs to companies that can leverage the network, becoming a network themselves.
The New York Times: A Great Brand but Doomed?
Let’s take a look at the New York Timesto further drive home the Web-native information and distribution problems facing old media. Without looking at a five-year chart of the stock and just reading an occasional story about Google and old media as to how it relates to advertising growth, you might expect the stock of the New York Times to be hurting. You would be correct, and their peak in price closely correlates to the IPO of Google.
We could go through the business model, financials, and industry specifics, but it would be boring and painful.
Marc Andreessen, the founder of Netscape, sums up the problem in a blog post:
Well, given that the Internet is the central force dismantling the company’s business, I’m sure that by now they’ve stocked their board with noted Internet experts. Let’s see:
• Brenda C. Barnes—CEO of Sara Lee; noted snack cake expert
• Raul E. Cesan—former CEO of Schering-Plough; noted Levitra expert
• Daniel H. Cohen—president of DeepSee LLC, “an oce-anic exploration and submarine leasing company;” noted Jacques Cousteau expert
• Lynn G. Dolnick—former head of exhibits for the National Zo-ologic Park in Washington DC; noted marsupial expert
• Michael Golden—current publisher of the International Herald Tribune; former head of the company’s Women’s Publishing Division; noted sundress expert
• William E. Kennard—former head of the FCC; noted “seven dirty words” expert
• James M. Kilts—former CEO of Gillette; noted smooth, smooth shave expert
• David E. Liddle—here I have to take a pause as I actually know this one; based on what’s happening at the company, it could be rea-sonably asked whether he’s actually attending the board meetings.
• Ellen R. Marram—former CEO of Nabisco; noted Oreo expert. Oh, wait, she actually ran an Internet company: “From 1999 until 2000, Ms. Marram was president and chief executive officer of efdex Inc. (the Electronic Food & Drink Exchange), an Internet-based commodities exchange for the food and beverage industry.” Ooh. I wonder if that ended well.
• Thomas Middelhoff—former CEO of Bertelsmann; noted expert on complicated family politics—well, that’s probably coming in handy . . .
• Janet L. Robinson—current CEO of the New York Times Company; noted expert on horrific business implosions
• Doreen A. Toben—CFO of Verizon; noted 30-year debenture expert
• And finally, Arthur O. Sulzberger, Jr.—the Big Ka-huna—the Man—the Guy In Charge—the chairman and scion—the dude with the cojones to actually defend Judy Miller. Not noted Internet expert.
So, if you want to issue bonds to pay for FCC-approved snack cake manufacturing in a submarine on display at a national park by a sundress-wearing cigarette-puffing Levitra-popping Judy Miller, you’re pretty much set. Go team!
Pretty funny, yes, but you get the point. Drastic times call for drastic measures if you want to disrupt Google’s stranglehold on how the Web and information work in 2008 and beyond. You are either Web native or you are sucking the fumes of Web-native companies. Based on the board the New York Times has as-sembled, it will be hard to revive financial success of the New York Times brand from a newspaper model to a more Web-native media company. And it will be nearly impossible to stem the bleeding of advertising dollars to the Web.
Google also offers information to anyone, anywhere—from students studying late at night with no access to a library, to the corporate executive looking at financial statements at 11 P.M. researching merger and acquisition candidates. Google’s services can be shaped and fitted to anybody’s needs. It has become a market maker for words. Google “shrank” the world by allowing anyone to find almost anybody or anything anywhere. Google also leveraged the Internet, which is maybe the number-one most addictive thing I can imagine. That also gave Google tremendous economies of scale and margin.
As usual, Umair Haque (www.bubblegeneration.com), a great thinker, had a thought-provoking post about branding in the Internet age (also on my blogroll). “Data as a Commodity” helps further explain the phenomenon of Google:
Data is inherently valueless in the edgeconomy, because it’s infinitely replicable. Any structure seeking to limit access to data will simply be too radically inefficient for the market to bear in the medium-long run. So a mass-conomy strategy of “owning” a massive stock of data is destined to crash and burn. Rather, what is valuable is being plugged into (and plugging others into) the right flows of data. That’s what Google does. You ask, I bid—flows. It’s what Facebook refuses to do. And it’s a small example of why media—in 2007, even new media—sucks. We can’t reinvent industries if we don’t think more deeply about their economics.
This is good stuff, although I would argue that Facebook could realize this shortly (to be covered in Chapter 10).
Information is the most important everlasting trend because information gives people power. Obviously, Google leads the pack, but another great example of a company that benefited from this trend is Research In Motion (RIMM), creators of the BlackBerry, which allowed people to receive and send e-mail from anywhere. The first BlackBerry was an ugly piece of equipment, but it served an important function. The early adopters were stockbrokers, who used it to solve two of their problems. First, they could communicate information much more quickly because it was mobile. Second, it allowed them a channel of communication around the hierarchy. The financial industry is highly regulated, and the BlackBerry gave stockbrokers an unregulated back channel to discuss stocks and share information.
RIMM slowly expanded on that basic communication function, but they also kept it simple. Parents liked it. Kids liked it. It was easy to adapt to. It crossed over from stockbrokers to ad execs, to nurses, to people in government. Those people liked it for the same reasons stockbrokers did: it’s fast, simple communication from anywhere to anyone. Research In Motion has done a few things since the BlackBerry was introduced, such as improve the design. But the key element that got them over the top was that the BlackBerry became addictive. People get addicted to information just as they do to anything else. We are, most of us, information junkies. No matter what industry you are in, information does give you an edge.
Shrinking the World
A percentage of every investor’s portfolio should be in products or services related to shrinking the world. These companies do one or more of three things:
1. Offering those products or services
2. Leveraging the existing network infrastructure
3. Helping people live in a constantly shrinking world
The most explosive way to add value to a portfolio over time is to tap into the businesses that are doing these things. Google shrank the world by bringing people together with other people, with products, and with services and information. It also benefited from the shrinking world by building on top of the telecom infrastructure, and it helps people live in a shrinking world. Google did all three. It made a market in data. Market makers print money.
For companies that do those things best, profits are insane. Anything that is involved in the shrinking-world trend will increase commerce, and anything that increases commerce will drive revenue and profit. Railroads, airplanes, and the tele-graph come to mind. Companies like Western Union and Federal Express are good examples. Some of the wealthiest people of all time have been in the business of shrinking the world.
Shrinking the world means enabling people to connect with one another, or products to move better, faster, and cheaper. That might mean that Howard Lindzon can meet his Chinese counterpart online, and read his profile and think, Holy smokes! We’re interested in the same things. Or he could find me. Now the product I create could be distributed in China. He thinks the way I think, and he understands the market in China, and he sees that my product can be successful there. It’s done—imagine Wallstrip in Chinese! As recently as 2000, you could not easily dream, yet alone execute your idea, globally.
The shrinking world was really good to GPS (Global Positioning System) companies, companies that became the rage in 2006 and 2007 and persisted on the all-time-high list. I started writing about it in 2005, pointing out that GPS was available on cell phones, it is easy to use, it was becoming standard equipment in higher-end cars, and it was available in rental cars as well. People coming from the U.K. to the U.S. who rent a car to drive across the country no longer need to get maps. They turn on the car and it talks to them and tells them where to go.
For twenty years before that, mapping had been a big thing. Microsoft was one of the first companies to offer mapping software. For a few hundred dollars you could drive around with a map that you printed at your PC. Now it is free. If you go to Google Maps, you can even zoom in on your home. You can now do this from your phone if your car does not offer the service.
GPS has many applications and has rather quickly become ubiquitous. Once price declined, mainstream adoption followed. It was a trend helped along by a shrinking world. Satellite companies and software companies also profited. Major companies like Nokia paid billions of dollars to integrate products from start-up companies into their cell phones and give those things away as part of the cost of their hardware or services.
Online collaboration is another trend in the shrinking world. Let’s look at the big picture. The time is now. We have proliferation of cheap bandwith, open-source software, cheap hardware, and, most importantly, demand and the urge to connect. It’s the pen-pal phenomenon on steroids.
Who is going to be the budding Apple in this space of online collaboration? Could it actually be Apple? Facebook and MySpace are the big early leaders. Google is definitely after the prize as well.
Vice
To be honest, most investors need look no further than a good list of vice stocks. In fact, if you have no ethical concerns about owning these businesses, just do it. Vice stocks are part of an incredibly strong everlasting trend: tobacco, alco-hol, sex, and gambling are the best examples.
In fact, FocusShares has created a sin-based ETF. I will give you two chances to guess its three-letter symbol.
The hottest vice sector today is online poker, where a fourteen-year-old math whiz in New Zealand who can scrape together an entry fee can play online poker against the CEO of a major corporation. There are no significant barriers to entry, and the play can be anonymous. It is a frictionless, viral game and is now a multi-billion-dollar business.
There are tournaments, and the same person will not win all of them. It is almost impossible to do that. Roger Federer can run for five years as a tennis champion, but in poker the winner might be a high-school dropout, a nineteen-year-old piano whiz, a truck driver, or almost anyone with math skills. Casinos are being built across the United States and now you have Macau in China. People love to gamble. It is impossible to stop, and pretty much recession proof.
The “arms” dealers to the casinos have been some of the best- performing stocks ever. International Game Technology (NYSE: IGT) is a stock I own and we have covered on Wallstrip, and IGT supplies a majority of the slot machines around the world. WMS Industries and Bally’s have been hugely successful as well. The buildup of Macau in China has obviously helped extend their growth.
The worldwide love of video games has been very good for companies such as Nintendo, Sony, Electronic Arts, GameStop (retailer), Take-Two (subject of a $2 billion bid from Electronic Arts), and Activision (now Vivendi). I love this industry because the subculture has been accepted. The innovation unleashed by the best-selling game Guitar Hero will push the industry into yet another hyper-growth period. Har-monix, the game’s creator, has taken game interaction to the next level of creativity. All the video gaming companies above have been profiled at Wallstrip. These companies are only limited by the creativity of the people, as our shrunken world has created a global marketplace. The proliferation of the Web and the addictive nature of games and immersion by kids have created a huge demand for online multi-player games as well. Strangers play against each other over the Web. There is no money wagered (not legally yet), but the stage is set for fast growth as companies chase a share of the increasing pie.
Sex, ironically, as a vice has not been a very successful public market investment. It isn’t well accepted in our conservative society, at least in the public and institutional financial world. The successful companies have not needed the spot-light to amass fortunes.
Furthermore, institutional money does not want to be associated with sex: “Oh no. I’m not going to invest in a fund that invests in porn!” In 2007 a friend mentioned Rick’s Cabaret as an amazing investment opportunity. He explained that their model was simple: “Starbuckify strip clubs.” The stock was near an all-time high, so I was intrigued. In fact, we Wallstripped the company. When you think of that kind of business, you think of sleazy guys running a cash-only enterprise. You think of Tony Soprano. I did some more checking and loved the concept. In fact, institutions were accumulating the stock. The stock eventually took off to the upside and more than tripled from our date of profile.
Whether investing in porn is right or wrong, whether it is for you or not, there is endless demand for the products and services, and some of the very big companies in the next decade are going to appear from this sector. If we enter a difficult investment period, I am convinced that the venture capitalists will look to the porn-ography space for disruptive Web companies. Profits matter, the world is shrinking, and if we in the U.S. won’t do it, someone else will. You can cross those stocks off your list for whatever ethical reasons you have, but if the name of the game is catching a trend, then you need to look at some public companies that are in the game of making money off sex.
Beware! There are definite risks in vice stocks. As any company gets bigger, new obstacles appear, and companies involved in vices have obstacles that others don’t have. Online poker was one of the biggest open-field enterprises in our time. It was stopped overnight by government legislation. It went from a hundred miles an hour to zero because the government said, “You can’t open an account at these poker places.” Regulation can kill business overnight.
Even Google would suffer if the government gets involved. No business model or sector is foolproof. Understand that occasionally the government does show up, or a class action lawyer, or a different administration that says, “Screw the tobacco industry,” or something along those lines.
But in the end, vices are not going away. Your odds of finding winners among vice stocks are much higher than in other areas, so if you want to make money in the stock market over time, regardless of the economy and market, keep a good list of vice stocks. You can count on Wallstrip and my blog to keep you updated on this sector.
War
Sadly, a third everlasting human trend is war. In the stock market, war is a bullish phenomenon because it creates a movement of money that is unmatched by other trends. War mobilizes government, and governments print currency. Governments can write check after check that change businesses and business direction overnight, spending on new companies and on old companies and reviving old product lines.
Wars have historically led to surges in the stock market. Wars generate huge profits for the arms dealers, and therefore investment and trend opportunities. Fifty years ago the boom was about tanks and guns. Today it is about such things as aero-space, unmanned drones, Kevlar vests, imaging, and satellites. Technology and weapons have been a perfect combination for profits.
Wars always last longer than politicians promise. The Iraq war was going to be a seven-day event, but if you had sold Lockheed Martin, Boeing, General Dynamics, or Raytheon when Saddam Hussein’s statue fell, you would have left great profits on the table When a war is over, defense stocks do not just slow down—they flat-out stop. Timing the end of wars and conflicts is not your goal; money management, including partial sales on the way up, will help you profit from the business of war.
Health, Wellness, and Vanity
People have been chasing the “Fountain of Youth” since the beginning of time. Egyptians wanted to live forever. Romans didn’t want to die, despite the fascination with gladiators. With wealth comes an addiction to living.
There are two sections in the health, wellness, and vanity trend: products that need FDA approval and those that don’t. I generally stay away from the former because there is too much risk. Exceptions would be companies that already have FDA approval and are changing the way we do things. Allergan (NYSE: AGN) is an example of such a company. Whether this is for good or bad reasons doesn’t matter, because people have accepted Allergan’s products. Botox, implants, and the ability to turn back time are just a huge area of growth and price is no object. Allergan’s margins are fantastic, and the stock ripped higher between 2005 and 2007.
America is obese, and it is likely our own diets, not just our lack of physical activity, that are doing us in. The weight-loss stocks have been a wild ride. I am watching the space for new leaders all the time. WeightWatchers has been the steadiest and most consistent public market weight-management company. WeightWatchers now has an online presence for men. My doctor told me that men who weren’t users of the product are now starting to use the online version. A company like Weight-Watchers that develops great tools and real solutions will score points in the stock market. It could just be old boring baseline food companies that revives this category. Watching the all-time-high lists will let you spot trends in the space early.
I am particularly fascinated by the “sleep” industry. Since I started blogging in December 2005, sleep has been a regular topic and I have owned most of the stocks in the space. After Apple, sleep is mentioned in more of my blog posts than any other word. It remains a favorite topic of mine, and a favorite among everlasting trends, but I have blown everything I made investing in the category on sleep apnea tests, sleep machines, and Ambien.
Sleep has been a hugely profitable industry for investors. Sanofi-Aventis (NYSE: SNY), is the maker of Ambien, the first blockbuster sleep drug. I have owned the stock, but when Ambien came off patent, I sold. We also profiled Respironics (sleep machines—NASD: RESP) on a funny Wallstrip. ResMed is the other big company in the sleep-machines business. The stocks have been incredible long-term performers and in late 2007, Respironics was acquired at a large premium by Philips. Respironics is a great example of great things happening to stocks in uptrends. For investors, the industry of sleep will remain a money maker as America ages. In case you were wondering, Ambien works for me.
In Good Times and Bad: Sometimes Great Brands Go on Sale
I love certain brands that are now iconic: International Game Technology (slot machines), Electronic Arts (gaming), American Express, Federal Express, Altria (tobacco), and Goldman Sachs. They are true leaders in their respective industries, but sometimes they do get sold and sold hard. They are always on the tip of my tongue and I am always watching their prices in weak markets for an opportunity to add shares. I prefer to add these specific brands when they have fallen at least 25 percent from their all-time highs. I don’t like paying up for their stocks because they do not grow as fast as they once did. In good markets, I prefer to own the fastest, best-trending stocks.
When markets suck, I look at established companies that are involved in ever-lasting trends that could be out of favor. In March 2008, one of those times arrived. I added American Express because of the “credit crisis” market melt-down. I would rather buy consumer brands like American Express when nobody likes it than when everybody likes it. Their growth will return. The brands have survived many credit and bear cycles. If you say the name of those great companies in a crowd, people nod their heads. Because those companies are mature and they own their niche, there is no reason to chase them when times are good, even if they do reach an all-time high. When things get bad and the hot stock with the fancy name starts going down, individual investors and institutions get nervous fast. Stodgy old companies stay stodgy old companies, but they generally occupy very profitable spaces.
To-Do List
1. If you are investing in Web leaders going forward, stick to Web-native companies.
2. Google is reinventing the way information is managed and served.
3. Software-as-service Web companies like salesforce.com are part of a new Web everlasting trend.
4. Don’t forget vice, war, and wellness stocks. There are hundreds of future winners and even some oldies.
5. In bad markets, look for my familiar names on sale within ever-lasting trends.