Saturday, September 5, 2009

Innovation investments hold more risk

According to Warren Buffet (The Snowball), while technological novelty has advanced mankind in general, its investments usually end badly. He mentioned some empirical evidence of this at a private talk, from cars to airplanes.

Cars and planes

They are no doubt a couple of seriously significant inventions from the last century. Around 2,000 car companies existed at one time, and out of those, only a handful (Ford and sort of GM?) stands today. The rest have pretty much all gone belly up, taking shareholders down (enriching short sellers).

No single air travel business has generated greater-than-actual-rate-of-inflation returns for its investors, notably the ones who have gone bankrupt. Given that business schools, parents, and TV preach creativity, industrial revolutions and stuff, naturally the question comes, “what gives?”

Good ideas still have limits

Management conflict of interest, miscommunications, competition, idealistic albeit inadequate budgeting, are but some profit making hurdles an innovative product/service idea itself can not overcome. Another point from Buffet, as these “new technology” firms push for esoteric products/services, the complexity in estimating their actual, intrinsic value does nothing but increase UNCERTAINTY.

The negative correlation between VIX and major stock indexes advocates that uncertainty leads to price drops. It is pretty clear cut, and again mainstream belief took the wrong side.

0 Reflections: