In the field of financial markets, The year 2024 will go down in the books as one of the years with the greatest investment euphoria in history and, probably, as the peak of the largest bubble that Western markets have experienced to date. While a significant part of the assets that have participated in this bubble are supported by technological innovations, such as semiconductors or artificial intelligence, which have already had a notable impact on our societies (and whose importance will continue to increase), another part of The bubble has been spurred by assets whose reality is considerably different from the initial expectations held for them, and whose ability to satisfy any need is still, at best, uncertain – read, the cryptocurrency industry.
In an economic environment of these characteristics, the challenge that every investor faces is twofold. First, determine whether it is possible to benefit from technological changes through specific investments using an analytical, consistent and, at least partially, predictable process. Secondly, knowing how to protect yourself from the devastating destruction of wealth that inevitably follows the bursting of any financial bubble, while avoiding those businesses that, dragged down by technological progress, become redundant and condemned to oblivion. Readings from a CFA Professional: One of the best biographies ever written.
Although numerous stories have been written about the bubbles of the past and the economic repercussions they had once they burst (two years ago I published a review of a book to this effect in this column), the selection is reduced to a minimum if we stick to to those works that try to provide a response to the two aforementioned challenges. Probably, one of the best books that addresses this challenge is Engines that Move Markets: Technology Investing from Railroads to the Internet and Beyond, by Alasdair Nairn, current CEO of Edinburgh Partners – which also published another entertaining story about the SPAC bubble in 2021 titled The End of the Everything Bubble, which is just as relevant today. Engines that Move Markets It was originally published in the midst of the dotcom euphoria, although the author republished a second edition in 2018 including the teachings of that episode.
Throughout ten chapters, The work shows us the ups and downs of the investors who bet on the cutting-edge technologies of their timegoing through different episodes chronologically that ended up leading to perfect examples of investment speculation. These episodes, which span two centuries of history, are: the development of railways in Great Britain in 1840, railway expansion in the United States two decades later, the rise of the automotive industry at the beginning of the 19th century, the invention of electricity (and the light bulb), the creation of the oil industry, the telegraph and telephone businesses, the history of the creation of radio and television in the early 20th century, the rise of the computer and the semiconductors starting in the 1950s and finally the internet and dotcom era in the 1990s.
The book offers in each chapter a fascinating amount of details that will captivate lovers of business and corporate history. At the risk of simplifying, in the following paragraphs I would like to explain in detail what are, in my opinion, the four most important conclusions, from an investment perspective, that our readers can draw from the 600 pages of the book.
The first is that The investment community’s interest in each new innovation follows a fairly similar pattern in each case. As Nairn explains: “However, a striking feature of each chapter is the fact that, although the patterns have not been identical in each case, they have been very similar. First, existing technology and potential new investors receive a new invention with skepticism. Such skepticism is gradually replaced by enthusiasm as entrepreneurs appreciate the sales potential of the new technology. New entrants soon appear in the market and can access venture capital financing. in general, they do good in the market (in terms of its share price) thanks to the wave of enthusiasm. So far so good; but when the technology begins to mature, realism inevitably appears, some companies start to run out of resources. to close, only the strongest survive and naïve investors lose money in the enormous sieve. Pessimism begins to invade the market and share prices fall across the board. Finally, the market stabilizes.
“The second conclusion, which will not surprise anyone who has dedicated a minimum of study to the field of business strategy, is that aspects such as entry barriers or the competitive structure of an industry are key to the eventual success of technological investments. In all the episodes studied in the book, without exception, companies that did not enjoy patent protection or other sustainable competitive advantages ended up seeing how competition eroded their returns sooner or later. Additionally, Nairn maintains that those companies that are able to continually adapt and reinvent themselves, as Standard Oil did at the time or Microsoft more recently, can maintain their relevance in a changing environment. Unfortunately for investors in these companies, however, such metamorphoses are never obvious in advance.
The third conclusion is great dispersion of returns between winners and losers in each introduction of a new technology. According to Narin, “[l]Most of these episodes tend to be associated with only one or two successful companies: Western Union in the telegraph business, GE in lighting, Ford and GM in the automobile industry, IBM in computers, Microsoft in the computer business. software. However, the ultimate success of these companies was far from a foregone conclusion. For every company that built a lasting market position, there were hundreds of others that tried to do the same – and failed.”
The last and fourth conclusion is a corollary of the previous one, and without a doubt, the most important and instructive, since it reminds us of the importance of having a minimum of humility about our capabilities and what should be expected of us. Because although it may be relatively easy to identify winning technologies and we also have time to adjust portfolios (for example, it was obvious for many years to informed observers that railways were going to replace canals as a means of transporting goods in the United Kingdom , although this dynamic took at least fifteen years to be fully reflected in the price of channel companies), The real difficulty lies in identifying the companies that will be leaders in each new technological paradigm. Instead of pursuing the uncertain task of identifying the latter, investors should focus their efforts on recognizing sectors with adverse dynamics, a task more feasible with sufficient dedication. The case of Intel, which in two decades has gone from being the undisputed titan of silicon to simply an emblem of corporate loss of direction, serves as an eloquent reminder of the inherent risk of investing in the most advanced technologies – not even the giants of the past are guaranteed their place in the future.
Technical sheet
Qualification: “Engines that Move Markets: Technology Investing from Railroads to the Internet and Beyond”
Author: Alasdair Nairn.
Editorial: Harriman House, 2018, pp.570, hardcover.
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