Investing in Innovation

“Is it a new idea, or is it just new  to me?”

The pertinent question

He’s been a trader at a bank for a number of years, but he obviously still needs some seasoning. “I can’t see not owning Apple,” he said to me the other day. “I look around and everyone has at least one of their devices. I have four!”

Compare this with the response I got as a rookie broker in the early seventies when I asked an older guy if buying Syntex, first maker of The Pill, was a good idea. The stock was sticking up on a flagpole, having already gone up a thousand percent or so. The grizzled old veteran stared at me hard for a bit. Then, recognizing me for the newbie I was,  his expression softened and he raised his eyebrows and quietly said, “Now?”

Here’s Apple today, and it looks just like Syntex did in 1972:

APPLE

Technology stocks usually capture the imagination of the crowd after the best part of the move is over. Microsoft took over the world before it became the most widely held stock in the universe. Here’s MSFT after it became popular:

                                            MICROSOFT

There is no doubt that innovators are often where the biggest opportunity for making money lies. The problem, and it’s a huge one, is figuring out when to buy and sell them. Contrary to the popular conception, you can’t hold these stocks forever. To make money in the stock of an innovator you have to buy them after they’ve gotten kicked around (A),  and sell it when the growth funds are rushing into them (B). Or, as my old mentor used to say, “Buy ’em when they’re no good. Sell ’em when they love ’em.”

I’m going to buy the iPhone 5 when it’s released in October. It will be Apple device number six in our housebhold. I am sure as hell not going to buy the stock.

Observations

Great technology stocks tend to make their highs about the time the investing world comes to regard them with awe, reverence and complete conviction. Often, this happens around important market peaks. Syntex topped late in ’72, just before the ’73-’74 bear market. Microsoft peaked along with the high in the NASDAQ in 2000. Will the top we are going through now sound the death knell for AAPL? I don’t plan to test it.

Bear markets are usually when the great stocks of the era stop going up (even though the crowd continues to love and own them), setting the stage for a new, new thing to come with the next bull market. My candidate for the next big thing is brussells sprouts. Seriously.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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