Why Stocks Are Doing So Poorly

tripleb · Post by **tripleb** » Sat Sep 24, 2011 3:08 pm

Forget about unemployment.
Forget about inflation, deflation, or stagflation.
Forget about Operation QEx Twist.

The reason stocks are doing crappy is due to a failure to innovate. Why has Apple done huge gains over the last decade? They are innovating. Just about all other companies are failing to innovate.

Look at Microsoft. They are losing $1B per year on Bing. They tried to break into the search engine market that was and is still dominated by Google. You can keep throwing more and more cash into it, but there's not much more to innovate on search algorithms in isolation. The future of searching online is trust-based recommendations from your social circle. Thus, Google+ will eventually tie into search algorithm and return search results based on friends' opinions. Microsoft is failing to innovate and is essentially only profitable from their legacy OS stuff; then they throw the earnings into failed ventures such as Gaming, Phones, and Bing (if you don't believe me, look at how much money Win7 phones and Xbox are losing annually).

Now let's look at the leading competitor to Apple for #1 Marketshare: Exxon. Are they innovating? Is it even possible for them to innovate? Understand that market cap is based on revenue, not profit. Simply by having huge streams of cash coming in from legacy oil fields that Exxon accumulated through years of M&A activity is enough to keep them at #1/#2.

What other markets do we have in the US?

Utilities? Regulated by government to hit a certain fixed profit level.

Consumer Staples? Most of their "innovations" of the last decade are "Squeeze" measures of CPGs that are designed to put out the same product using 0.5% less materials to reduce COGS by a few basis points since that's all they can really do. Not much innovation there.

Consumer Discretionary? This one is directly affected by the economy, and with consumers having no money, they can't buy stuff they don't need.

Energy? As mentioned above in Exxon, there's no room for innovation. Before you say "Solar Power" you should Google "Solyndra." They destroyed One Half Billion Dollars of tax payer money trying to innovate in this field.

Healthcare? With government spend accounting for just over 50% of all healthcare dollars (Between VA, Medicare, and Medicaid), and with huge pressures to cut costs, there's not much along the lines of profits to be found here. With new taxes on big Pharma, innovation will be stifled as a lower possible profit will deter investment into R&D.

REITs? They only make up a small portion of TSM on a market cap basis, but outside of financial engineering, there's no innovation to be had here. It has historically tracked inflation, and essentially has no expected "real" return.

Industrials? They could innovate, but lack R&D funds due to a crappy economy.

Telecomm? Their innovation seems focused on creating monopolies and raising prices.

Materials? Again, heavily tied to the economy.

I don't see any "out" of the recession simply because there's no innovation. There are a few industries that could potentially innovate, but due to the poor overall economy, they are focused on squeezing out every lost penny of cost just to stay afloat, and it's hard to innovate when you're barely treading water. It seems like a Catch 22 with no solution.

That said, I still plan to "stay the course" because there simply isn't anything better to invest in than stocks, bonds, gold, and cash right now.

natureexplorer · Post by **natureexplorer** » Sat Sep 24, 2011 3:54 pm

Apple got lucky.

Sidney · Post by **Sidney** » Sat Sep 24, 2011 3:55 pm

I'll challenge you with a couple of examples:

Energy - there has been a lot of innovation in deep water off-shore drilling.
Industrial - there has been a ton of innovation in robotics and machine control. If you were to go through an automotive plant say 15 years ago and then a new one today, you'd hardly recognize it.

natureexplorer · Post by **natureexplorer** » Sat Sep 24, 2011 4:09 pm

Sidney wrote:Energy - there has been a lot of innovation in deep water off-shore drilling.

For example?

jstat · Post by **jstat** » Sat Sep 24, 2011 4:11 pm

I don't claim to have any special insight, but this is how thing look to me...

Ten years ago I was working for a start-up that successfully developed innovative software based in part on my ideas and research, and made some money in the process.

Since then, the company has been swallowed by a gigantic company that seems to be oblivious to its customer's needs, and the product is surrounded by lawyers trying to claim patent infringement. More recently, a product I was working on as open source software was claimed by another company, and thereby became worthless; no one has the time or money to fight the potential lawsuits.

I have ideas for products, but the chances of getting them built look bleak, and the chances of making any money look non existent.

hicabob · Post by **hicabob** » Sat Sep 24, 2011 4:16 pm

natureexplorer wrote:Apple got lucky.

Apple did outstanding industrial design for innovative products that people want - then backed it up with excellent software and good support - that takes more than luck.

Littlefinger · Post by **Littlefinger** » Sat Sep 24, 2011 4:25 pm

when this faster than light thing works out you'll look pretty silly

baw703916 · Post by **baw703916** » Sat Sep 24, 2011 4:40 pm

tripleb wrote:What other markets do we have in the US?

That doesn't provide any explanation as to why the 65% of world market cap that isn't domiciled in the U.S. isn't doing any better lately.

bertilak · Post by **bertilak** » Sat Sep 24, 2011 4:42 pm

natureexplorer wrote:
Sidney wrote:Energy - there has been a lot of innovation in deep water off-shore drilling.
For example?

A 15 second Google search showed up this http://www.shell.com/home/content/innov ... echnology/ There are others I didn't look at.

Ignoring the deep water aspect, one bit of oil well innovation has been all over the news lately: HYDRAULIC FRACTURING. It may be controversial, but it is new and innovative, making vast quantities of energy economically viable.

jebmke · Post by **jebmke** » Sat Sep 24, 2011 4:43 pm

hicabob wrote:
natureexplorer wrote:Apple got lucky.
Apple did outstanding industrial design for innovative products that people want - then backed it up with excellent software and good support - that takes more than luck.

Except now I notice that drivers have to text with both hands instead of only one.

natureexplorer · Post by **natureexplorer** » Sat Sep 24, 2011 5:20 pm

hicabob wrote:
natureexplorer wrote:Apple got lucky.
Apple did outstanding industrial design for innovative products that people want - then backed it up with excellent software and good support - that takes more than luck.

And so did others.

plnelson · Post by **plnelson** » Sat Sep 24, 2011 5:24 pm

natureexplorer wrote:Apple got lucky.

Could you elaborate on this? I'm a software engineer and Android programmer. I don't see how you can deny that Apple has innovated extensively with its iPods, iPhones, iPads, Macbooks, etc.

plnelson · Post by **plnelson** » Sat Sep 24, 2011 5:29 pm

tripleb wrote: Energy? As mentioned above in Exxon, there's no room for innovation. Before you say "Solar Power" you should Google "Solyndra." They destroyed One Half Billion Dollars of tax payer money trying to innovate in this field.

But meanwhile plenty of other PV makers have been successful.

Also, shale gas extraction ("fracking") has revolutionized the natural gas industry. As a result of this the US looks like it will be self-reliant on natural gas AND a natural gas exporter for years to come! I don't see how anyone can say this is not innovative.

ourbrooks · Post by **ourbrooks** » Sat Sep 24, 2011 5:32 pm

Alas, there's nothing new about hydraulic fracturing. It's been done commercially for at least 60 years. http://www.spe.org/jpt/print/archives/2 ... raulic.pdf

The only thing that's changed is that price of oil and gas have gotten high enough for long enough so that the extra cost is justified.

jh · Post by jh » Sat Sep 24, 2011 5:32 pm

.....

natureexplorer · Post by **natureexplorer** » Sat Sep 24, 2011 5:34 pm

plnelson wrote:
natureexplorer wrote:Apple got lucky.
Could you elaborate on this? I'm a software engineer and Android programmer. I don't see how you can deny that Apple has innovated extensively with its iPods, iPhones, iPads, Macbooks, etc.

Where did I deny that they have innovated? Other companies have come out with great innovative products as well, but they didn't succeed. Apple got lucky.

natureexplorer · Post by **natureexplorer** » Sat Sep 24, 2011 5:39 pm

ourbrooks wrote:Alas, there's nothing new about hydraulic fracturing. It's been done commercially for at least 60 years. http://www.spe.org/jpt/print/archives/2 ... raulic.pdf

The only thing that's changed is that price of oil and gas have gotten high enough for long enough so that the extra cost is justified.

Thank you!

I don't see any great innovation in offshore drilling. It has been incremental progress and it is heavily a function of cost. No game changers in my book.

What changed the game was the concept that there can be good quality oil reservoirs in deepwater settings, but that has been around for decades now as well. Similarly shale gas has changed the game. However, producing from oil shales and tar sands has not changed the game, even though that was just as innovative.

tripleb · Post by **tripleb** » Sat Sep 24, 2011 5:49 pm

bertilak wrote: Ignoring the deep water aspect, one bit of oil well innovation has been all over the news lately: HYDRAULIC FRACTURING. It may be controversial, but it is new and innovative, making vast quantities of energy economically viable.

So if it wasn't for this new technology, gas might have gone up 500% over the last decade instead of only 200%. Very innovative.

I like what a previous poster had to say about innovation and patent trolls. It seems that in today's world, as opposed to 10 years ago, the way to make money is to sue people and try to claim patents, rather than invent new things. Other popular sources of money seem to be government grants, re: solar energy and others.

Neither of these will actually "grow" the economy because nothing new is being created. In fact, it will destroy economic value because resources are being wasted arguing for control of things that already exist, and resources redistributed through the government into programs (like solar energy) that are not viable on their own, and are essentially destroying resources.

I don't know what the answer is. I do know that the economy can't grow without innovation and there seems to be nothing promoting it. If anything, the new "patent reform" that happened recently has made barriers to innovation much greater than they were before.

dave66 · Post by **dave66** » Sat Sep 24, 2011 5:49 pm

Stock market aside... As far as Apple's real world success, I would hardly call that luck. Granted... As far as the computer world goes... It wasn't like it was that hard to upstage the default standard of computers in the 80's and 90's. Most PCs back then made a brown paper bag look exciting. But you can't keep writing off Apple's success much longer after that. They ARE innovative. Their products appeal to people that have an interest in design... People who believe that things are more than just 'things'... That they have purpose beyond functionality. Apple (Steve) has always understood that.

That said, I am more worried about Apple now, than I ever was back in the doom and gloom days. Back then, I just laughed off all the irrational anti Apple hatred. But Steve and the people directly associated with him, will be gone some day. I feel that it could be very easy for some younger 'mobile' generation kids to come in and decide they're going to throw their golden monkey wrench in there... and all of the sudden one day they'll be like; "So... Why do we make these computer things again"? And that will be that for the actual 'computer' in Apple computer.

Success is a very dangerous thing. And Apple has tons of it right now. All it takes is some over zealous accounts and/or self appointed business geniuses, to screw up the whole thing. As far as why the market is down. I have no idea. Most of that seems psychological to me. I think most people just don't understand what the plan is. Everybody keeps waiting for a plan... Any plan that we can just stick with. Even if it's not perfect. Nobody seems to be standing up to provide that.

bertilak · Post by **bertilak** » Sat Sep 24, 2011 6:03 pm

tripleb wrote:
bertilak wrote:Ignoring the deep water aspect, one bit of oil well innovation has been all over the news lately: HYDRAULIC FRACTURING. It may be controversial, but it is new and innovative, making vast quantities of energy economically viable.
So if it wasn't for this new technology, gas might have gone up 500% over the last decade instead of only 200%. Very innovative.

Did you consider that oil prices may have been affected by a hostile political environment?

I like what a previous poster had to say about innovation and patent trolls. It seems that in today's world, as opposed to 10 years ago, the way to make money is to sue people and try to claim patents, rather than invent new things. Other popular sources of money seem to be government grants, re: solar energy and others.

There may be a lot of that going on but it has nothing to do with actual innovation and is quite a non sequitur.

... resources redistributed through the government into programs (like solar energy) that are not viable on their own, and are essentially destroying resources.

Couldn't agree more, but that is irrelevant to the question of whether or not there is any innovation in the oil industry, which was what I was addressing.

neverknow · Post by **neverknow** » Sat Sep 24, 2011 6:08 pm

tripleb wrote:I don't see any "out" of the recession simply because xxx "fill in the blank"

I clipped you and a supposed reason for it. The reason why I did so, is this feeling of gloom, or stagnation, is precisely what the early 80's felt like to me. I was employed - never even any chance of loosing my employment. I was getting pay raises inline with the inflation of the time. It felt like nothing was going anywhere, and I would never raise my standard of living. That this was it - it would never get any better.

I was vastly wrong, of course. This comforts me today. Because it does feel the same. Like we are all biding our time until - something. Many of us have put our affairs in order, in fact cocked, ready to launch -- if anything would just change. (like paying off mortgages, etc)

And that is my point. Change does happen, if for no other reason then the passing of years. Particularly, the culture of the USA is not a static environment. I am pretty sure most of the youth have world shaking ideas (it is the nature of youth).

I don't think innovation is it, because if you look at the 30's there was all that labor saving innovation ready to be adopted - cars, refrigerators, even indoor plumbing. People had no money.

It is the ebb and flow of "the times". It will change. In the meantime, don't forget to have as happy a life as possible. The sun does not rise and fall on stock prices. Last I knew the sun comes up every morning, because the earth spins on an axis. And that continues on, every day.
neverknow

knowmad · Post by **knowmad** » Sat Sep 24, 2011 6:14 pm

natureexplorer wrote:Other companies have come out with great innovative products as well, but they didn't succeed. Apple got lucky.

That's because Apple is both innovative and focused on the details. Most innovations at other companies are mismanaged so badly that the resultant products suck. Apple also knows how to say no to feature bloat. A great product is as much about what it doesn't do as what it does do.

So it wasn't at all luck.

yobria · Post by **yobria** » Sat Sep 24, 2011 6:19 pm

You should forward your comments to Steve Ballamer, so Microsoft can begin innovating at 9AM sharp Monday morning.

Wait, better load up on MS stock first, once you put them on the right track, their stock is sure to pop.

Nick

FrugalInvestor · Post by **FrugalInvestor** » Sat Sep 24, 2011 6:24 pm

natureexplorer wrote:Apple got lucky.

Seems they've gotten lucky more than once. Very unlikely but possible I suppose. It'll be interesting to see if they continue to get lucky as often as Jobs' involvement continues to wane.

bob90245 · Post by **bob90245** » Sat Sep 24, 2011 7:15 pm

This type of topic appears to violate forum policies for fruitlessly arguing over non-actionable issues.

Guido · Post by **Guido** » Sat Sep 24, 2011 7:20 pm

natureexplorer wrote:Apple got lucky.

thats an absurd statement probably by microsoft advocat.

ourbrooks · Post by **ourbrooks** » Sat Sep 24, 2011 7:27 pm

To elaborate a bit more on the hydraulic fracturing comment, it's been known for a very long time that there were geological formations, such as the Bakken shale, which held a lot of natural gas. The problem was that the pores in the rock were blocked by clay so that the natural gas wouldn't flow very well. You could drill wells but you wouldn't get enough natural gas out to be viable.

It's also been known for a very long time that if you drilled horizontal wells, to increase the area of the well bore in contact with the formation, and if you did hydraulic fracturing to break apart the rock, you'd get a lot more natural gas out. Why wasn't this done earlier? Because it was too costly. Both horizontal drilling and fracturing are expensive. If nothing else, horizontal drilling is much slower than vertical drilling. Fracturing involves huge pumps and costly chemicals.

Over time, there have been millions of innovations to both of these techniques, but the biggest thing that changed is simply that the prices for oil and natural gas rose high enough for long enough so that horizontal drilling and hydraulic fracturing became cost effective.

If you blame hostile government for rising oil prices, you should also blame the government for the increase in gas supply due to horizontal drilling and hydraulic fracturing.

SP-diceman · Post by **SP-diceman** » Sat Sep 24, 2011 7:32 pm

tripleb wrote:Forget about unemployment.
Forget about inflation, deflation, or stagflation.
Forget about Operation QEx Twist.

The reason stocks are doing crappy is due to a failure to innovate. Why has Apple done huge gains over the last decade? They are innovating. Just about all other companies are failing to innovate.

Weird, the way companies stop innovating right when recessions happen.

Thanks
SP-diceman

Dan Moroboshi · Post by **Dan Moroboshi** » Sat Sep 24, 2011 7:39 pm

bob90245 wrote:This type of topic appears to violate forum policies for fruitlessly arguing over non-actionable issues.

Nah. It does have to do with the underlying principle of stock valuation.

I don't recall which book it was, but William Bernstein used an analogy for innovation and how it gets to market. (IIRC, it was in the Four Pillars of Investing)

Basic science is like someone operating a hand pump. It produces water which gushes forth intermittently in spurts. The water then enters a trough or pipe. Someone at the end of waterway perceives the water as coming out as a more or less steady, continuous stream.

The pump operator is the innovator, venture capitalist, or early adopter. The pipe is the market. The person at the end of the pipe is the consumer, or retail investor.

By the way, the concept of iPads existed before Apple.

Star Trek: http://en.memory-alpha.org/wiki/PADD

2001 - A Space Odyssey: http://www.youtube.com/watch?v=JQ8pQVDyaLo

Gumby · Post by **Gumby** » Sat Sep 24, 2011 7:40 pm

natureexplorer wrote:
plnelson wrote:
natureexplorer wrote:Apple got lucky.
Could you elaborate on this? I'm a software engineer and Android programmer. I don't see how you can deny that Apple has innovated extensively with its iPods, iPhones, iPads, Macbooks, etc.
Where did I deny that they have innovated? Other companies have come out with great innovative products as well, but they didn't succeed. Apple got lucky.

Apple often takes technology (invented by others) and popularizes those technologies to the point where competitors are forced to play catch-up:

- The Mouse (Macintosh, 1984)
- The Graphic User Interface (Macintosh, 1984)
- Laptop Trackpads (PowerBook 500, May 1994)
- USB (iMac, 1998)
- Portable MP3 Player (iPod, 2001)
- Online Music Store (iTunes, 2003)
- Multitouch (iPhone, 2007)
- Accelerometers (iPhone, 2007)
- App Store (iTunes, 2008)
- Tablets (iPad 2010)

Apple didn't invent any of those technologies. But, somehow they managed to revolutionize the industry with each of the product releases listed above.

They've changed the way we consume media on this planet (especially music). There is no way that's luck. Apple has proven itself as being able to revolutionize and popularize technologies in a way that no other company can.

FredPeterson · Post by **FredPeterson** » Sat Sep 24, 2011 7:42 pm

What we need is a transformative technology. Something that will improve efficiencies across all industries and come up with new and simpler ways of doing things. Computers and electronics were that boom over the last 30-40 years.

Thats what drives an economy. If you truly study economics I'm betting thats what you will find in every era of a true economic recovery and boom. What happens when the transformations benefits stop? Revolutions, recessions, depressions. Things grind to a halt and people go crazy and the greedy figure out ways to get away with stuff. They tried a financial transformation in the 2000's and look where thats lead us.

As a side, IMO the only transformative technology that will echo across all industries and provide a true economic rise is nano and unfortunately I think thats years away yet. But thats a topic for a different forum.

Nathan Drake · Post by **Nathan Drake** » Sat Sep 24, 2011 7:50 pm

Even if the original post is true (and I don't believe it to be true), how exactly is that insight helpful for an investor?

Timing the market over the long term is just like trying to time innovation -- best of luck trying to accomplish success doing either.

yobria · Post by **yobria** » Sat Sep 24, 2011 8:04 pm

FrugalInvestor wrote:
natureexplorer wrote:Apple got lucky.
Seems they've gotten lucky more than once. Very unlikely but possible I suppose. It'll be interesting to see if they continue to get lucky as often as Jobs' involvement continues to wane.

With 20,000+ stocks, the one which has done the best over the last X years will have gotten lucky many, many, times, though there was skill as well.

Nick

MachAF · Post by **MachAF** » Sat Sep 24, 2011 8:29 pm

Nobody is innovating because its too costly to get sued. Look at what Apple has done ligation wise. How many law suits have they filed or has another company files against them?

I wouldn't want to innovate either.

There are companies who sole purpose is owning/buying patents and suing. Pretty much a joke. For $500,000 a year we will protect you using our patents and if you don't join us we'll sue you. Welcome to the new America.

Legal system needs to change to be not so law suit friendly. We've even had a member of this board want to Vanguard take to small claims court over some $50 IRA transfer fee. He must not understand time=money.

thirdman · Post by **thirdman** » Sat Sep 24, 2011 9:41 pm

Situational bias makes it hard to see where the next innovation will come from. Apple used off the shelf components and innovated. Even the GUI was a PARC innovation.

Exxon Mobil's business model was founded on monopoly. So is Microsoft's. They are not innovative by nature.

The current economy is the result of trade, monetary, fiscal and other spending of the federal government. It is hard to say what will happen politically. There are a lot of examples in history which ended in disaster, but also where there were better outcomes.

Google, Facebook and Amazon could not be predicted. Neither could the integrated circuit, PC or iPad. No one predicted the role e mail would play.

No one knows how the current situation in the US will turn out. No one knows what will happen in Malaysia or Indonesia. What we can say is that the US has a lot of problems. We can know the current situation, at one point in time.

bob90245 · Post by **bob90245** » Sat Sep 24, 2011 10:17 pm

Dan Moroboshi wrote:
bob90245 wrote:This type of topic appears to violate forum policies for fruitlessly arguing over non-actionable issues.
Nah. It does have to do with the underlying principle of stock valuation.

Huh? Well, yes we can have a discussion about stock valuations. Which you are the first to bring up here in this thread.

OK, if we discuss valuations, I suppose someone will tell us that valuations are too high. Therefore, we should sell stocks now. That's actionable.

grayfox · Post by **grayfox** » Sun Sep 25, 2011 2:14 am

tripleb wrote:
The reason stocks are doing crappy is due to a failure to innovate. Why has Apple done huge gains over the last decade? They are innovating. Just about all other companies are failing to innovate.

There is truth in what you say.

I recall back in the 1970s, 1980s and 1990s, every smart guy that graduated from MIT headed for silicon valley to work at an engineering startup, where they invented things like PCs, Windows, Macs, iPods, cell phones, etc. that made everyones life better.

In the 2000's, latter day MIT geniuses go to work at a hedge fund or bank on Wall Street, where they work in financial engineering and invent things like MBSs, CDOs and CDS, or write HFT software, the purpose of which is to make rich people richer, but also blows up and destroys peoples pensions and put millions out of work and millions out of their homes.

Talent and genius have been wasted the past decade.

dave66 · Post by **dave66** » Sun Sep 25, 2011 3:34 am

neverknow wrote:
I clipped you and a supposed reason for it. The reason why I did so, is this feeling of gloom, or stagnation, is precisely what the early 80's felt like to me. I was employed - never even any chance of loosing my employment. I was getting pay raises inline with the inflation of the time. It felt like nothing was going anywhere, and I would never raise my standard of living. That this was it - it would never get any better.

I was vastly wrong, of course. This comforts me today. Because it does feel the same. Like we are all biding our time until - something. Many of us have put our affairs in order, in fact cocked, ready to launch -- if anything would just change. (like paying off mortgages, etc)

And that is my point. Change does happen, if for no other reason then the passing of years. Particularly, the culture of the USA is not a static environment. I am pretty sure most of the youth have world shaking ideas (it is the nature of youth).

I don't think innovation is it, because if you look at the 30's there was all that labor saving innovation ready to be adopted - cars, refrigerators, even indoor plumbing. People had no money.

It is the ebb and flow of "the times". It will change. In the meantime, don't forget to have as happy a life as possible. The sun does not rise and fall on stock prices. Last I knew the sun comes up every morning, because the earth spins on an axis. And that continues on, every day.
neverknow

I believe the core reasons for economic issues run so much deeper than just numbers and policies. I believe people need something to believe in... Something to invigorate them. Something that is real... Not just an empty speech. Something that has nothing to do with the economy. Something that maybe even flies in the face of reason and logic. Going to the moon was a perfect example. Was it practical? No. Was it logical? No. But it polarized the world. That is what we need... Something that makes people feel like humanity is so much more than just economic babble and news people telling us how screwed we are. We need to feel like we have a real purpose. A purpose that has greater meaning than buying a McMansion and having as many toys in the driveway as possible.

But unfortunately, many people (and also our government), can't seem to find the courage to have such lofty goals. Watching the game and buying cheap crap at Walmart, seems to be as adventurous as anybody is willing to get.

jwillis77373 · Post by **jwillis77373** » Sun Sep 25, 2011 5:30 am

I hesitate to point this out, but.

There is a bias that that blinds us to history. We tend to try and explain the world in terms of what we know now this instant in time, and never consider 'we will know more later'.

It's easy to select a perceived winner, or invincible opponent and pose them as an example, as an axiom, a given truth and build up an argument around them in their favor.

This is true of a stock, a market, or a company.

In the case of Apple.. I believe, but cannot prove. Some luck was involved, but so was the perception by Steve Jobs that the microcomputer could become transformative in the lives of everyone, not just the people building them. And that vision evolved over time. Jobs had an advantage when returning to Apple in that few people were left that could compete with his vision. Today that is not the case, after his influence wains.. the company may linger, as does Microsoft, but it will loose its ability to follow the ideas of a single person and its influence will dissipate.

In the case of the market.. I believe, but cannot prove. There are many examples of companies succeeding where circumstances allowed a lucky or fortunate individual to impose a single correct (as judged by history) vision. There are plenty of examples where the opposite is true. But we tend to forget those because of survivors bias.

Finally.. in the case of stocks or investing.. I believe, but cannot prove. Holding an opinion is one thing, but having the ability to implement change is not generally granted to any one of us. The best we can do is choose an investment strategy and "stay the course".

The patrons of this Forum generally 'choose' to accept one principle.. costs matter.. and that in general.. the market may swing both ways.. but tends to grow over time. Personally I think we have no other choice than to assume the market will continue to grow over time, the alternative just hasn't been proven to be true over long stretches of time.

Gumby · Post by **Gumby** » Sun Sep 25, 2011 7:20 am

jwillis77373 wrote:Personally I think we have no other choice than to assume the market will continue to grow over time, the alternative just hasn't been proven to be true over long stretches of time.

Isn't that only true for the best performing stocks of the US market? Here's the fine print on those long term trends:

"These long-term data cover solely the financial markets of the United States. (Most studies show that stocks in other nations have provided lower returns and far higher risks.) In the early years, the data are based on fragmentary evidence of returns, subject to considerable bias through their focus on large corporations that survived, and derived from equity markets that were far different from today's in character and size (with, for example, no solid evidence of corporate earnings comparable to those reported under today's rigorous and transparent accounting standards). The returns reported for the early 1800s were based largely on bank stocks; for the post-Civil War era, on railroad stocks; and, as recently as the beginning of the twentieth century, on commodity stocks, including several major firms in the rope, twine, and leather businesses. Of the 12 stocks originally listed in the Dow Jones Industrial Average, General Electric alone has survived." - Source: Common Sense on Mutual Funds By John C. Bogle, David F. Swensen (P. 10-11)

http://books.google.com/books?id=KCCl0T ... 22&f=false

The long term growth trends of stocks aren't exactly as straightforward as they seem on first glance.

The bullish long-term trend for stocks is based on a changing basket of stocks through the most economically successful period of the United States and will not necessarily repeat itself.

Zav · Post by **Zav** » Sun Sep 25, 2011 8:00 am

The problem is not innovation, it is incentives. American companies, in fact, most companies, do not have enough incentive to innovate. We live in an investor driven economy. Investors want returns quickly. Unfortunately, innovation is very time consuming, and it is risky.

We really need to change the investor mindset. Focus on long term performance rather than the short term.

I think poor incentives are the primary problem. My colleagues in industry always complain to me about this. In addition, the argument is economically sound; it agrees with what the economic literature has shown: essentially, that the institutions which shape incentives are always at the heart of every problem and solution. Institutions may not play thee role, however, they usually play one of the largest roles.

Valuethinker · Post by **Valuethinker** » Sun Sep 25, 2011 8:17 am

tripleb wrote:Forget about unemployment.
Forget about inflation, deflation, or stagflation.
Forget about Operation QEx Twist.

The reason stocks are doing crappy is due to a failure to innovate. Why has Apple done huge gains over the last decade? They are innovating. Just about all other companies are failing to innovate.

Look at Microsoft. They are losing $1B per year on Bing. They tried to break into the search engine market that was and is still dominated by Google. You can keep throwing more and more cash into it, but there's not much more to innovate on search algorithms in isolation. The future of searching online is trust-based recommendations from your social circle. Thus, Google+ will eventually tie into search algorithm and return search results based on friends' opinions. Microsoft is failing to innovate and is essentially only profitable from their legacy OS stuff; then they throw the earnings into failed ventures such as Gaming, Phones, and Bing (if you don't believe me, look at how much money Win7 phones and Xbox are losing annually).

Now let's look at the leading competitor to Apple for #1 Marketshare: Exxon. Are they innovating? Is it even possible for them to innovate? Understand that market cap is based on revenue, not profit. Simply by having huge streams of cash coming in from legacy oil fields that Exxon accumulated through years of M&A activity is enough to keep them at #1/#2.

You've confused Market Cap with Market Share-- that alone makes me suspect your argument.

Actually market cap is based on PE (or EV/ EBITDA, or more properly, Discounted Cash Flow as a measure of Enterprise Value) and PE is a profits related measure (price to earnings).

Distribution companies and contractors sell for 0.5 times sales or less, software companies trade hands at 3-4 times sales. That's the impact of different profit margins.

What other markets do we have in the US?

Hot air?

Utilities? Regulated by government to hit a certain fixed profit level.

Actually the US utility industry has gone through an unprecedented period of deregulation.

Consumer Staples? Most of their "innovations" of the last decade are "Squeeze" measures of CPGs that are designed to put out the same product using 0.5% less materials to reduce COGS by a few basis points since that's all they can really do. Not much innovation there.

You are in the wrong country. Emerging Markets have seen vast innovations in consumer products to make them salable in those markets-- Head & Shoulders in small sachets etc.

Consumer Discretionary? This one is directly affected by the economy, and with consumers having no money, they can't buy stuff they don't need.

Consumption is still over 65% of US GDP, and over 50% of any developed economy.

Energy? As mentioned above in Exxon, there's no room for innovation. Before you say "Solar Power" you should Google "Solyndra." They destroyed One Half Billion Dollars of tax payer money trying to innovate in this field.

Trivial for a nascent industry. Wind energy has dropped 90% in cost in 30 years. Solar is on the same track down (started higher, moving down faster).

Healthcare? With government spend accounting for just over 50% of all healthcare dollars (Between VA, Medicare, and Medicaid), and with huge pressures to cut costs, there's not much along the lines of profits to be found here. With new taxes on big Pharma, innovation will be stifled as a lower possible profit will deter investment into R&D.

Big pharma has given up on innovation. New drugs don't encounter price controls, yet productivity per dollar spent has plummeted. R&D for big pharma now largely consists of buying, and trialling, drugs developed by biotech spinouts of universities and big labs.

Healthcare remains highly innovative in terms of products. Real innovation when it comes will have to come on the payment/ insurance side: welcome to the world of single payer, which is where every other developed country is (more or less) already.

REITs? They only make up a small portion of TSM on a market cap basis, but outside of financial engineering, there's no innovation to be had here. It has historically tracked inflation, and essentially has no expected "real" return.

Industrials? They could innovate, but lack R&D funds due to a crappy economy.

The correlation between innovation and R&D expense is low. If you look at what is in a 'family' car now vs. 20 years ago, you'd have to say that innovation has been remarkable (GPS, airbags, ESC, anti lock brakes etc. etc.).

Go drive a BMW 1 Series with its new fuel saving technologies and see innovation at work in a highly mature platform. Go drive a Prius or a Spark to see the beginnings of something very big.

Peugeot is marketing a hybrid diesel in Europe, the 308 MPV.

Telecomm? Their innovation seems focused on creating monopolies and raising prices.

Materials? Again, heavily tied to the economy.

Materials always moves slowly but consider the Dreamliner-- it will be the world's best selling plane, and it uses unprecedented amounts of carbon fibre.

Telecoms I'd say the innovation is incredible. Skype anyone?

I don't see any "out" of the recession simply because there's no innovation. There are a few industries that could potentially innovate, but due to the poor overall economy, they are focused on squeezing out every lost penny of cost just to stay afloat, and it's hard to innovate when you're barely treading water. It seems like a Catch 22 with no solution.

That said, I still plan to "stay the course" because there simply isn't anything better to invest in than stocks, bonds, gold, and cash right now.

There are at least 2 serious flaws in your argument:

- the first is to fact, you have not shown that innovation has slowed down.

Consider Energy. The rush into Shale Gas has transformed the US, and the world, natural gas supply picture. There is *far* more extractible gas out there than we thought (perhaps 2-3 times previous estimates) due to the shale gas technologies-- all widely introduced only since 2002.

Or mobile technology. Consider the smartphone now vs. the basic executive phone in 2000. Or the iPad, or the Kindle. 1mpbs download on 3-4G, vs. 56kbps on 2.5G then.

So without quantitative evidence of such a slowdown, I'd have to mark that as a thesis stated but unproven

- the second is as to logic, and your understanding of technology and economics. Innovation does not lead to higher profits. In fact, it normally destroys profits. Consider the tobacco industry (low innovation, highly profitable, high creation of shareholder value) vs. the tech industry (value creation in the hands of a handful of companies and venture capitalists, whereas most tech companies fail, and companies like Amazon destroy traditional value chains and industries (as Amazon is now doing to book publishing and retail)

Each wave of innovation: the steam train, the telegraph, electricity, radio, tv, commercial aviation etc. has led to the destruction of industries and the fall in margins and return on capital across the value chain.

VictoriaF · Post by **VictoriaF** » Sun Sep 25, 2011 8:47 am

In some fields innovations are very valuable, and hopefully are forthcoming. In other fields innovations are damaging, and hopefully they will be curtailed.

Valuable potential innovations may include:
- education
- stem cell based medicine
- energy
- nanotechnology
- neuroscience applications

Damaging ongoing innovations include:
- litigation
- financial engineering
- advertising

Victoria

Valuethinker · Post by **Valuethinker** » Sun Sep 25, 2011 8:51 am

VictoriaF wrote:In some fields innovations are very valuable, and hopefully are forthcoming. In other fields innovations are damaging, and hopefully they will be curtailed.

Valuable potential innovations may include:
- education
- stem cell based medicine
- energy
- nanotechnology

Damaging ongoing innovations include:
- litigation
- financial engineering

Victoria

Here is the good news. Litigation and financial engineering can damage or destroy the economy, but *not* the human race.

Nanotechnology and perhaps stem cell technology can certainly destroy the human race.

A packaging company invented a 'widget' that would allow almost instantaneous cooling of a soft drink can. One small problem: it produced a gas several hundred times more effective than CO2 in blocking infra red radiation in the atmosphere, which would last 100s of years. Fortunately a popular outcry prevented its widespread adoption.

*there* is your classic harmful innovation

.

VictoriaF · Post by **VictoriaF** » Sun Sep 25, 2011 8:57 am

Valuethinker wrote:
VictoriaF wrote:In some fields innovations are very valuable, and hopefully are forthcoming. In other fields innovations are damaging, and hopefully they will be curtailed.

Valuable potential innovations may include:
- education
- stem cell based medicine
- energy
- nanotechnology

Damaging ongoing innovations include:
- litigation
- financial engineering

Victoria
Here is the good news. Litigation and financial engineering can damage or destroy the economy, but *not* the human race.

Nanotechnology and perhaps stem cell technology can certainly destroy the human race.

A packaging company invented a 'widget' that would allow almost instantaneous cooling of a soft drink can. One small problem: it produced a gas several hundred times more effective than CO2 in blocking infra red radiation in the atmosphere, which would last 100s of years. Fortunately a popular outcry prevented its widespread adoption.

*there* is your classic harmful innovation .

It's never black-and-white, is it?

Litigation and financial engineering are destroying the human race by other means. They are causing the destruction indirectly, by making certain innovations that could protect the human race legally or financially infeasible.

Victoria

Valuethinker · Post by **Valuethinker** » Sun Sep 25, 2011 9:00 am

Zav wrote:The problem is not innovation, it is incentives. American companies, in fact, most companies, do not have enough incentive to innovate. We live in an investor driven economy. Investors want returns quickly. Unfortunately, innovation is very time consuming, and it is risky.

Really? The standard equipment on a passenger car now vs. 20 years ago (and BMW say innovates even faster).

WalMart and its culture of continuous innovation in logistics?

Track the history of TV from say 'Adam 12' or 'Dragnet' to the verite of 'Hill Street Blues' to the sublime creation that is 'The Wire'? I'd say US TV (via HBO) is incredibly innovative. The complexity of story line, plot, character is Dickensian or Proustian in something like 'The Wire'. All to my mind made possible by 'Hill Street Blues' and by 'Homicide: Life on the Street'. Consider the original Battlestar Galactica (bland morality play with biblical themes) to the remake.

Energy production technology has shown huge innovations. Since GE drove the Combined Cycle Gas Turbine out into the power market in the 1980s, the whole way utilities build power stations has transformed. You can build an 800MW power station now in less than 2 years, in the 1970s just clearing the site would have taken that. Oh and your base thermal efficiency has *doubled* from c. 30% to 55-57%.

Go and plug in a Compact Fluorescent lightbulb (get a Philips 2700K softtone one) or an LED halogen substitute and contemplate how much the ordinary 60 watt bulb has changed in 10 years.

Track the energy efficiency of home appliances. OK fridges: 2000 kwhr pa down to under 400 kwhr pa in about 25 years. That's extraordinary. But I could buy an EU-rated 'AAA' fridge now which would use 40% less energy than my 'A' rated fridge of 4 years ago.

If you poke around the eco building materials market you see some really impressive improvements: triple glazed windows with U values below 1.0 (that's R6 in American: take 1/U value and multiply result by 5.6). Walls down to U 0.1 (that would be R56 in American). Not to mention 'old' technologies like sheep's wool that are making a comeback (they are hygroscopic and so ideal for wet permeable situations).

We really need to change the investor mindset. Focus on long term performance rather than the short term.

I think poor incentives are the primary problem. My colleagues in industry always complain to me about this. In addition, the argument is economically sound; it agrees with what the economic literature has shown: essentially, that the institutions which shape incentives are always at the heart of every problem and solution. Institutions may not play thee role, however, they usually play one of the largest roles.

Institutional Economics is great stuff and I've devoted a lot of personal time to understanding it.

But we still don't really understand:

- why humans form organizations (the Coase theory re Transactions Cost Economics does not really work)

- how organizations work as internal markets

Williamson I must say I find nearly impenetrable- muy bad perhaps.

Economics of Innovation seem, to me, to similarly lack hard, predictive conclusions.

I would say John Roberts in Milgrom and Roberts (out of print now?) and his later Oxford Lectures is the best writer on this.

http://www.amazon.co.uk/Economics-Organ ... 0132246503

http://www.amazon.co.uk/Modern-Firm-Org ... 212&sr=1-5

It seems to me companies in many industries are highly incentivized to innovate.

I agree there are strong barriers to innovation arising from institutions.

Tuxx · Post by **Tuxx** » Sun Sep 25, 2011 9:06 am

Deleveraging and austerity.

torius71 · Post by **torius71** » Sun Sep 25, 2011 9:46 am

jh wrote:Actually there is a lot of innovation going on in all kinds of industries. I would suggest people stop reading the MSM for news and start reading blogs that are focused on specific industries. You will get real information that way.

If all you read is the MSM then you will think the only thing of interest going on in the world is what kind of ridiculous outfit Lady Gaga is wearing to the next event.

+1

torius71 · Post by **torius71** » Sun Sep 25, 2011 9:51 am

VictoriaF wrote:In some fields innovations are very valuable, and hopefully are forthcoming. In other fields innovations are damaging, and hopefully they will be curtailed.

Valuable potential innovations may include:
- education
- stem cell based medicine
- energy
- nanotechnology
- neuroscience applications
- 3D Printing

Damaging ongoing innovations include:
- litigation
- financial engineering
- advertising

Victoria

SP-diceman · Post by **SP-diceman** » Sun Sep 25, 2011 10:18 am

I think by definition most long-term companies have innovated.
(you wont be around if you don’t)
Even in good economies companies still need growth.

Also the MS Bing reference is false, Bing was innovation, if Bing is losing money,
its because innovation is not a guarantee.
(doesn’t mean they didn’t innovate)

There is also some “luck of the draw” based on the economy and what your company does and
what your products cost.

One of the things Apple benefits from is, I can “treat” myself to a new gizmo for about $200 bucks.
Whatever the innovation, folks don’t like to buy new cars or houses during poor economic times
because its a major expenditure.

Thanks
SP-diceman

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