Wednesday, January 13, 2010

Saturday Fireside Chat

This article appeared originally on The Davian Letter, a premium content site for traders and investors. At least for the month of January, I will be posting the articles there first. I am not affiliated with the DL in any other way than just posting on their blog. This particular post was also a featured link on the Financial Times/Alphaville section, as well as on The Reformed Broker.



Let me tell you about this wonderful rock band from Liverpool, England. They were formed in 1959 and went on to have a three #1 singles in a quick succession. They were managed by Brian Epstein and signed with one of the EMI labels. You know who they were, right? They are Gerry and The Pacemakers.

Here's another story. In the early 1980's, a software company from Seattle develops and licenses a highly successful operating system for IBM 8086 PC's defacto becoming the (highly profitable) standard O/S for years to come. You know who they were, right? They were Seattle Computer Products who licensed the O/S exclusively to MSFT for redistribution for a fixed sum.

Here's something else. Have you tried France's oldest distilled spirit? It has been made in a specially designated geographic region for 700 years. There are also strict grape varietal requirements. The beverage is distilled and then aged in oak barrels. VSOP is an example of a grade for this spirit. You know what it is, right? It is armagnac.

And one final story. There are many sculptures and other artifacts left from a once-great civilization that lived on the territory of modern day Italy. They adopted Greek-style architecture, fought wars alongside with Carthage, mined copper and iron. You know who they are, right? They are the Etruscans.

This isn't some silly game show blog, why am I feeding you all the trivia?

I was listening to some Symphonic Pink Floyd on YouTube, and one of the suggestions that came up was a symphonic ABBA "Winner Takes All," a song where the Scandinavian beauties of the days past sing "the winner takes it a-a-a-ll..." Rome eventually absorbed the Etruscans and conquered a lot of other lands. Armagnac's largest export market is 22 thousand cases by my estimate (vs. cognac's 12 million case global volume). Microsoft went on to replicate its lack of original thinking by copying or acquiring Windows, Office, search, web-based email, game consoles, music devices, etc. And Gerry Marsden lives in anonymity while "Sir" Paul McCartney is worth over $1 bn, and enjoys a number of carnal privileges that come with fame and fortune.

The stories above are "winner take all" stories.

But there is something else in these stories that is relevant to investing. The winner took all, but at a time, the non-winner had even, may be better, chances to win. Something to keep an eye on with the smartphone wars, Defense Dept. orders, battery technologies, exploration permits, drug approvals, patent approvals, gambling licenses, toll infrastructure projects, radio frequency auctions and other apparent "winner takes all" competitions.

Appearances might be deceiving and a fundamental investor should be highly paranoid about competitive threats and the prospects of industry-wide profitability.

Air transportation "won" the long-distance passenger business but has been a losing investment proposition. Automobiles "won" personal transportation but only one non-bankrupt US manufacturer has survived. There is more information now than ever, and yet the information carriers of yesterday are near-dead. So are physical bookstores. So, go ahead, challenge those who assure you that their company has the winning model: they are the ones most likely to be asleep at the wheel.

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