Forum Archive Index - December 1999

[Sarah Corkill <Sarah.Corkill@directbroking.co.nz>]

Good Morning Everyone,

I would like to start my thanking Ben and Will for the forum that they have
provided everyone this year in Sharechat.  Best wishes for Christmas and
Y2K.

I like that you used Warren Buffet as an example and the fact that he has
never purchased tech stocks because his lack of understanding of them.  Mr
Buffet recently gave a rare talk on investing and his outlook for the
sharemarket and since you are using him as an example I would like to point
out the parrells that Buffet drew between "dot.coms" and histories "hot
stocks".  At the being of the century cars and planes were set to change
society much the same way as the internet is seen to change society today
and in many years to come.  If you look at the companies that were producing
these contraptions and what returns they gave to investors it is a sobering
thought considering the prices investors pay for tech stocks and possibly
what their future might hold.  None of the companies that changed society by
changing the way we travelled ever managed spectacular returns to investors
infact in was the opposite and most are now defunct.  Is this the way
dot.com's are heading?

>From the mouth of the Investing God (From Fortune Magazine)
"Well, I thought it would be instructive to go back and look at a couple of
industries that transformed this country much earlier in this century:
automobiles and aviation. Take automobiles first: I have here one page, out
of 70 in total, of car and truck manufacturers that have operated in this
country. At one time, there was a Berkshire car and an Omaha car. Naturally
I noticed those. But there was also a telephone book of others. 

All told, there appear to have been at least 2,000 car makes, in an industry
that had an incredible impact on people's lives. If you had foreseen in the
early days of cars how this industry would develop, you would have said,
"Here is the road to riches." So what did we progress to by the 1990s? After
corporate carnage that never let up, we came down to three U.S. car
companies--themselves no lollapaloozas for investors. So here is an industry
that had an enormous impact on America--and also an enormous impact, though
not the anticipated one, on investors. 

Sometimes, incidentally, it's much easier in these transforming events to
figure out the losers. You could have grasped the importance of the auto
when it came along but still found it hard to pick companies that would make
you money. But there was one obvious decision you could have made back
then--it's better sometimes to turn these things upside down--and that was
to short horses. Frankly, I'm disappointed that the Buffett family was not
short horses through this entire period. And we really had no excuse: Living
in Nebraska, we would have found it super-easy to borrow horses and avoid a
"short squeeze." 

U.S. Horse Population 1900: 21 million 1998: 5 million 

The other truly transforming business invention of the first quarter of the
century, besides the car, was the airplane--another industry whose plainly
brilliant future would have caused investors to salivate. So I went back to
check out aircraft manufacturers and found that in the 1919-39 period, there
were about 300 companies, only a handful still breathing today. Among the
planes made then--we must have been the Silicon Valley of that age--were
both the Nebraska and the Omaha, two aircraft that even the most loyal
Nebraskan no longer relies upon. 

Move on to failures of airlines. Here's a list of 129 airlines that in the
past 20 years filed for bankruptcy. Continental was smart enough to make
that list twice. As of 1992, in fact--though the picture would have improved
since then--the money that had been made since the dawn of aviation by all
of this country's airline companies was zero. Absolutely zero. 

Sizing all this up, I like to think that if I'd been at Kitty Hawk in 1903
when Orville Wright took off, I would have been farsighted enough, and
public-spirited enough--I owed this to future capitalists--to shoot him
down. I mean, Karl Marx couldn't have done as much damage to capitalists as
Orville did. 

I won't dwell on other glamorous businesses that dramatically changed our
lives but concurrently failed to deliver rewards to U.S. investors: the
manufacture of radios and televisions, for example. But I will draw a lesson
from these businesses: The key to investing is not assessing how much an
industry is going to affect society, or how much it will grow, but rather
determining the competitive advantage of any given company and, above all,
the durability of that advantage. The products or services that have wide,
sustainable moats around them are the ones that deliver rewards to
investors. 

This talk of 17-year periods makes me think--incongruously, I admit--of
17-year locusts. What could a current brood of these critters, scheduled to
take flight in 2016, expect to encounter? I see them entering a world in
which the public is less euphoric about stocks than it is now. Naturally,
investors will be feeling disappointment--but only because they started out
expecting too much. 

Grumpy or not, they will have by then grown considerably wealthier, simply
because the American business establishment that they own will have been
chugging along, increasing its profits by 3% annually in real terms. Best of
all, the rewards from this creation of wealth will have flowed through to
Americans in general, who will be enjoying a far higher standard of living
than they do today. That wouldn't be a bad world at all--even if it doesn't
measure up to what investors got used to in the 17 years just passed. 

The auto industry transformed the world, but many hundreds of car makes
became road kill--among them the Berkshire and Omaha."


http://library.northernlight.com/PN19991109040000127.html?cb=13&sc=0#doc
To read the entire article for yourselves.

Kind regards,

Sarah Corkill
Direct Broking



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