“Our inventions are wont to be pretty toys, which distract our attention from serious things. They are but improved means to an unimproved end…”
- Henry David Thoreau, Walden
I have heard friends and others say this market reminds them of the late 1990s. For me, it does and it doesn’t.
On the one hand, “irrational exuberance” seems evident in the valuations of a bunch of speculative stocks. Off hand, I think of Virgin Galactic, which sports a $5 billion market cap and just reported a quarter in which it had no revenue. Or electric vehicle maker Nikola, which the market says is worth $11 billion and has practically no revenue. There are plenty of other examples.
It seems hard to believe any of these kinds of companies will be around in ten years, much less prove to be good long-term investments.
On the other hand, the big tech firms leading the market are not like the bubbly tech firms of the late 1990s bubble. Apple, Microsoft, Amazon, Facebook, Google… These are monster businesses. They generate lots of cash, have deep and wide moats around their businesses and have great balance sheets. Valuations are debatable, but not crazy high.
How so? Consider an interview of Warren Buffett by Andy Serwer in April. This one really stuck in my mind because Buffett’s answer surprised me. Serwer asked WB about the “so-called” FAANG stocks and whether they were in a bubble. Here is Buffett’s answer [bold added]:
“No, just the opposite. I mean, you're seeing in this kind of a market, those companies don't need capital. Well, Netflix needs capital. But basically, the big companies in market value don't need capital. And that will separate them even more from the rest of the pack. I mean, they have an incredible business model. If you look at the top 10 market value of companies go back 10 years, 20 years, 30 years. I mean, go back years. It's, you know, it's AT&T, the old AT&T, and General Motors, and Standard Oil, New Jersey, as it was called then.
But those companies needed money. I mean, when Andrew Carnegie went into the steel biz, he built one steel mill, made money on that, saved enough to three or four years later, he built another one… And now the really incredible companies are the ones that account for just the top five with being well over 10% of the market value of the country. They really don't-- they don't take capital. Their suppliers may in some cases, and all that, but they are really-- overwhelmingly, they're capital light. And that is really different.”
Read that carefully because that’s the key to understanding the separation these big stocks have enjoyed -- and that has seemed to have accelerated through the pandemic.
(Serwer then asked the question why Buffett didn’t own Google and Amazon. Buffett answered: “Well, that's a pretty damn good question. But I don't have a good answer.” I sympathize. At least, he owns Apple.)
This is not to say that all of these giants will be good investments from here. Market leadership changes. I’d recommend you read this thoughtful post, which starts:
“Today, America's five largest companies by market capitalization are all well-known technology and internet businesses: in descending order, Apple, Amazon, Microsoft, Alphabet (the parent company of Google), and Facebook. Historically, being one of the top companies by market cap has been a contrary indicator, both for the company itself and for the industry to which it belongs…”
Still, my view is there is no bubble in these big names. They may be overvalued. They may prove poor investments from here. But if you are waiting for a pop -- those 80% drawdowns, etc. as happened after 2000 - you could be waiting a long time.
Technological Change is Ecological
Seeing the CEOs of big tech hauled before Congress in an antitrust hearing brought to mind the word “technopoly.”
So far as I know, Neil Postman coined the term in his book Technopoly: The Surrender of Culture to Technology. But he used it in a different sense than you might think. In his own words:
“New technologies alter the structure of our interests: the things we think about. They alter the nature of our symbols: the things we think with. And they alter the nature of community: the arena in which thoughts develop… I call it Technopoly.”
His idea of why technology is disruptive is vivid and worth sharing here:
“Technological change is neither additive nor subtractive. It is ecological. I mean “ecological” in the same sense as the word is used by environmental scientists. One significant change generates total change.
“If you remove the caterpillars from a given habitat, you are not left with the same environment minus caterpillars: you have a new environment, and you have reconstituted the conditions of survival; the same is true if you add caterpillars to an environment that has had none.
“This is how the ecology of media works as well. A new technology does not add or subtract something. It changes everything. In the year 1500, fifty years after the printing press was invented, we did not have old Europe plus the printing press. We had a different Europe. After television, the United States was not America plus television; television gave a new coloration to every political campaign, to every home, to every school, to every church, to every industry.
“And that is why the competition among media is so fierce. Surrounding every technology are institutions whose organization—not to mention their reason for being—reflects the world-view promoted by the technology. Therefore, when an old technology is assaulted by a new one, institutions are threatened.”
It maybe took a while to see this when it comes to the Googles, Amazons, etc., but now it seems obvious how Postman was right. (By the way, the book came out in 1992).
I think the market today is particularly alive to Postman’s point. And that is why anything that seems “disruptive” gets a lot of attention and, often, a seemingly crazy valuation. The market knows the stakes. It’s not just about winning some business from more mature competitors. It’s a whole ecology that is at stake.
*** Walden
I was on vacation last week at Lake Anna, VA, and re-read Thoreau’s Walden.
This was an important book for me in my twenties. I’ve read it straight through at least 3-4 times, but have dipped into it many more times. I haven’t read it from beginning to end, though, in at least 15 years.
Anyway, after reading it again, I was reminded why I loved the book so much in the first place. It’s very quotable, of course, but the life philosophy that underlies the book is the real appeal. The idea of simplifying your life, of realizing you don’t need all the trappings everyone else around you seems so eager to get, of paying more attention to nature and the change in seasons… Thoreau has lots of words of wisdom to share.
I also appreciate the book more after reading Laura Dassow Wells’ excellent biography, Thoreau: A Life. And not only because it took Thoreau nine years to write the book, which went through seven drafts. But the man himself was a fascinating character.
He had a lot of different skills -- beyond being a great writer. He was also a fine lecturer. He could read five different languages. Thoreau was quite the village handyman - he could stone a cellar, put up fences, build shelves, etc. Emerson and other residents of Concord would hire him to do all kinds of projects.
He was also an accomplished gardener, and was known in town for his melons. He was a professional surveyor (he couldn’t make it just on his writing and speaking). He was good mechanically and helped with the family pencil business to design a better pencil. And he was a great outdoorsman.
Thoreau packed in a lot of living in a short life. (He died at the age of 44 in 1862.) Hard to believe he died a relatively "minor" writer. The giants of New England literature then were Emerson, Hawthorne, Alcott, Longfellow, Channing... But, as in markets, so in literature. Fortunes change. Today, few would deny Thoreau's place among the greatest writers of any age.
Thanks for reading.
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Published August 4, 2020
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