The thing is, if you go back a year and measure the growth in that period of time, the trend looks quite different, because it would miss that huge dip that's occurred in 2008.
If you look at trends over time, Fred, then there's some justification in being an optimist.
As for "tired" companies vs. new companies, we'll see if you are right. I have a feeling that the determining factor for long term success will be whether or not companies were highly leveraged without sufficient profit margins, not whether it's "tired" vs. new.
infoarbitrage
· 1 year ago
Mark, I think the issue has more to do with commoditization, which is the key driver of profit margins. Differentiated offerings will yield high margins (AAPL, GOOG), while those which are commoditized will not. Technology as an enabler will help spur innovation, changes in production processes and product design and will foster differentiation and value-added. Capital structure decisions are the province of managements, and there will always be some that are good and some that are not, so I think leverage is too situation-specific to make generalizations. Interesting question, for sure.
fredwilson
· 1 year ago
wow, what a great conversation this post has already spurred. it's interesting to note that both $goog and $aapl have no leverage in their balance sheets
howardlindzon
· 1 year ago
exactly fred and all any investor has to do is watch the all-time high list and NOTHING else to catch them. they show up there first. No tv, no magazines, no cnbc....something I have preached for much time. Good news is nobody does it and the winners will go unnoticed for long periods of time.
marc
· 1 year ago
unnoticed, this is pretty counter-intuitive and not much supported by evidence
howardlindzon
· 1 year ago
My fund and many others are evidence actually
marc
· 1 year ago
your fund is actually you first and no pre-determined investment strategy. besides, i don't see daily trading on the top 10 stocks as a strategy per se. with higher liquidity and high visibility, these stocks have greater std dev making it easier to avoid fundamental analysis type of decision. if you're currently successful, then enjoy because it may not last forever, as we all know. i find it hard to believe that constantly betting on winners is a/ a winning proposition on the long run b/ if a/ stands, something other people didn't noticed
infoarbitrage
· 1 year ago
Howard, the fact that you might be right scares me...
howardlindzon
· 1 year ago
rather early on a sunday to be already dissing me :) no?
fredwilson
· 1 year ago
Its NFL Sunday and the Jets are playing the Titans. I have to get my game going somehow.
howardlindzon
· 1 year ago
More importantl cards/giants
I have stock market flu, but NFL fever baby
infoarbitrage
· 1 year ago
you go, boy!
Ryan
· 1 year ago
Speaking of being scared early on a Sunday, Jets vs Titans?!? Fred you are a brave man ;)
jquaglia
· 1 year ago
Fred. This is just a really great post. Makes me look at the market--and particularly the Dow--in a completely different way.
The thing that has concerned me about relying on the "information age" to get us through this though are the revenue models of many Internet companies. I feel that companies with revenue models built on advertising will not be strong enough to pull us out of this mess. I'm also not sure that Internet companies will continue to see signoficant employment growth. Our most useful tools, Google for example, can be built by a relative few people compared to our manufacturing giants of the past.
fredwilson
· 1 year ago
well i think we have to remember that "advertising" or maybe even "marketing" is typically a significant part of most companies costs structures. some companies like coke (a dow company) spend a huge amount on marketing.
that's not going to change and the internet facilitates connections, conversations, and commerce better than any other medium.
i too am not optimistic about marketing and ad budgets in the next year or two, but its not like companies can stop marketing. they simply have to find out how to reach customers more efficiently
jquaglia
· 1 year ago
To your comment about the Internet facilitating commerce. I have always wondered if the Internet has created more value in simply the companies built directly off of it, or in the efficiencies it's created for virtually every company in the world.
fredwilson
· 1 year ago
The latter for sure
It reminds me of my friend Mark Pincus' comment to me about a year ago.
He said ³someone is going to build a business on top of social nets that is more valuable than any social net²
I laughed at him
Now I am sure he's right.
druce
· 1 year ago
the Internet ecosystem is similar to the Microsoft ecosystem in that one company (Google) gets most of the profits.
But if you sum up the efficiencies created by each ecosystem, distributed throughout the economy, they are far, far greater than those profits.
It should be hard for anyone else to build something on top of social nets, which in turn sit on the advertising platform, that's more valuable than the layers they are built atop. It would be a strategic screwup, like IBM letting Microsoft build something more valuable on top of the PC. The 2 guys on top of the food chain (Larry and Sergey) would be expected to extract the most value if they do their job right.
Fred, good points on that last statement. The only investors who will make it out of this downturn (generalizing here) will be those able to look further ahead to the turn. I see you've been doing that plenty with GOOG and others, but of course, it all depends on what your time horizon is like because we're clearly not there yet. But, I think one variable missing from this and Andy's analysis are the qualitative ones. For instance, it's difficult to take into consideration the emergence of the "information era" and how that impacted the markets. You have to go much farther back than ten years to understand how something so revolutionary affects the markets. Some researchers (me very little) have built some very interesting models (SEM's to be exact) on the impact that certain technologies have had on long-term market trends over the last 120 years. Of course, the industrial revolution was the largest, but the market activity directly thereafter is quite difficult to compare. But, you also have the emergence of certain natural resouces; you have transportation changes emerging; and, you have manufacturing developments; etc, etc, etc. Suffice to say, the impact reflected that it takes much longer that ten years for the market to adjust to such changes. So, to say the last ten years has been a dud based solely on DJIA returns would be spurious to say the least. Good find and good analysis.
shareme
· 1 year ago
If emerging markets has value, is buy outs by big players in those markets how an investor may gain reward without exactly the company going public? I guess it only work if the deal was mostly cash or stock of buyer or both?
For example, Google or Apple or Nokia could buy out a mobile web app dev start up that is targeting those touch screen devices with webkit browsers such as iPhone, Android, SymbianOS9 5th edition well okay that is a personal example :)
Okay back to my Darwin OS install to get the ipHone emulator running..
I should have word today on that other pesky seed capital funding issue with a PE person
85% common code base across Android, iPh0one, and SymbianOS9 5th edition touchscreen devices :)
Consumer LBS the easy way with no Server or very server infrastructure development..
Still working on getting someone to get me a MacOSX Laptop for x-mas for the cause..
David Dalka
· 1 year ago
Very wise words...everyone needs to read them and internalize them!
"I am an optimist, I guess you have to be one to be in my line of work. Even in the midst of the worst downturn in my lifetime, I am thinking about what's next, how we are going to make money in the next run. Because as Andy points out, there will be one and we should be using this downturn to position ourselves well for when it comes."
Gerald
· 1 year ago
I'm sorry, but I don't see what this post is saying other than, statistically, some stocks will do better (or worse) than the average and that if you pick those stocks that do better than average, you will do well. It's just a tautology to pull out a few stocks from the index and point out they're either better than or worse than average. There's no insight here.
hardaway
· 1 year ago
Why would anyone think the big returns would be in the established, tired companies of the Dow, when innovation and change come from small companies who are nimble enough to move with markets? I think we need to find new ways to look at investment in equities. The riskiest companies provide the best reward, and why wouldn't that be true of public markets? It is certainly true in private markets.
davidshay
· 1 year ago
Thomas Kuhn argued that for a paradigm to shift, the older generation has to die. For real. Perhaps that's what we're seeing now, with AIG and GM fighting for their lives. The older generation of companies (and ideas) is dying. It's not simply a shift from the industrial era to the information age. This has happened in the 80's and 90'a What we're seeing is the shift from an information economy organized around industrial principles into one organized around the laws of information (think New York Times vis-a-vis Automattic). In this respect, Fred, GOOG and AAPL are very different. Much of AAPL's business is still in the old model (proprietary hardware, trade secrets, expensive branding and marketing), whereas Google is 100% new DNA. And the difference between the two is accentuated in their mobile strategy. I suspect that AAPL can't keep it's growth for much longer, unless it leverages its iPhone business for some scalable vertical integration (people paying for Apps, people downloading songs), vis-a-vis Google whose business depends only on being able to generate a lot of mobile traffic and selling ads against it. So when looking for the upstarts and startups that will be the innovators in the next decade, we need to look for those who embrace the full extent of the ubiquity of information. Those who profit as products in this new new economy become replicated, commoditized, and shared freely. Google tops this list, but Automattic, Revision3, AMZN (for its cloud computing business), Salesforce.com all come to mind-- very different companies, to be sure, but all with the same basic realization: those that will win in the next boom are those that allow people to connect and share data, apps, content as easily and seamlessly as possible.
fredwilson
· 1 year ago
I totally agree about $goog vs $aapl. I've said that iphone is max and android is windows. One is an amazing product but closed. The other is clunky but open
However $aapl has gone the next step with the app store and app economy. They may get their this time
I am not as sure about automattic. For an open source company, they are very closed to services that they don't control
Fred
Andy
· 1 year ago
as usual - a strong piece of work which has it's genesis on the "treadmill of life."
this one will be in the hall of fame, when they reprint select posts for the book.
best,
Andy (and a smiling Richard Todd)
fredwilson
· 1 year ago
Book? I don't need any stinkin books!
Andy M
· 1 year ago
if artie lange can be #1 on the NY times best seller list - and the Jets are in 1st place at Thanksgiving -- well, you better be damn sure that you will write a book.
it is not "if" but "when......."
(and it will be a best of this blog - alonmg with your comments from the treadmill and bike rides, and moments.....)
AM
Adam N
· 1 year ago
The better way to do this is to give the ROI from a $10k investment. This methodology doesn't take into account dividends. Over a 10 year period, 7% per annum will double your money over a decade.
All Comments
If you look at trends over time, Fred, then there's some justification in being an optimist.
As for "tired" companies vs. new companies, we'll see if you are right. I have a feeling that the determining factor for long term success will be whether or not companies were highly leveraged without sufficient profit margins, not whether it's "tired" vs. new.
a/ a winning proposition on the long run
b/ if a/ stands, something other people didn't noticed
going somehow.
I have stock market flu, but NFL fever baby
The thing that has concerned me about relying on the "information age" to get us through this though are the revenue models of many Internet companies. I feel that companies with revenue models built on advertising will not be strong enough to pull us out of this mess. I'm also not sure that Internet companies will continue to see signoficant employment growth. Our most useful tools, Google for example, can be built by a relative few people compared to our manufacturing giants of the past.
that's not going to change and the internet facilitates connections, conversations, and commerce better than any other medium.
i too am not optimistic about marketing and ad budgets in the next year or two, but its not like companies can stop marketing. they simply have to find out how to reach customers more efficiently
It reminds me of my friend Mark Pincus' comment to me about a year ago.
He said ³someone is going to build a business on top of social nets that is
more valuable than any social net²
I laughed at him
Now I am sure he's right.
But if you sum up the efficiencies created by each ecosystem, distributed throughout the economy, they are far, far greater than those profits.
It should be hard for anyone else to build something on top of social nets, which in turn sit on the advertising platform, that's more valuable than the layers they are built atop. It would be a strategic screwup, like IBM letting Microsoft build something more valuable on top of the PC. The 2 guys on top of the food chain (Larry and Sergey) would be expected to extract the most value if they do their job right.
For example, Google or Apple or Nokia could buy out a mobile web app dev start up that is targeting those touch screen devices with webkit browsers such as iPhone, Android, SymbianOS9 5th edition well okay that is a personal example :)
Okay back to my Darwin OS install to get the ipHone emulator running..
I should have word today on that other pesky seed capital funding issue with a PE person
85% common code base across Android, iPh0one, and SymbianOS9 5th edition touchscreen devices :)
Consumer LBS the easy way with no Server or very server infrastructure development..
Still working on getting someone to get me a MacOSX Laptop for x-mas for the cause..
"I am an optimist, I guess you have to be one to be in my line of work. Even in the midst of the worst downturn in my lifetime, I am thinking about what's next, how we are going to make money in the next run. Because as Andy points out, there will be one and we should be using this downturn to position ourselves well for when it comes."
So when looking for the upstarts and startups that will be the innovators in the next decade, we need to look for those who embrace the full extent of the ubiquity of information. Those who profit as products in this new new economy become replicated, commoditized, and shared freely. Google tops this list, but Automattic, Revision3, AMZN (for its cloud computing business), Salesforce.com all come to mind-- very different companies, to be sure, but all with the same basic realization: those that will win in the next boom are those that allow people to connect and share data, apps, content as easily and seamlessly as possible.
However $aapl has gone the next step with the app store and app economy. They may get their this time
I am not as sure about automattic. For an open source company, they are very closed to services that they don't control
Fred
this one will be in the hall of fame, when they reprint select posts for the book.
best,
Andy (and a smiling Richard Todd)
it is not "if" but "when......."
(and it will be a best of this blog - alonmg with your comments from the treadmill and bike rides, and moments.....)
AM