Book Review: Engines That Move Markets: Technology Investing from Railroads to the Internet and Beyond
Technology Investing considered perilous
Book Review / Pitch
Ongoing investments / rebalancing
What am I reading
What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deduced from it.
Hegel
The four most expensive words in the English language are ‘This time it’s different.’
Sir John Templeton
(Quoted in the book)
Every bull cycle brings a wave of people who haven’t yet seen the movie, according to people who think they have seen the movie one too many times. Just counting how much assets are managed by people that call Buffet a dinosaur may actually get us somewhere with timing the market.
So it’s sort of surprising that it is only in 2001 that Sandy Nairn / Alasdair Nairn took the first stab at chronicling 10 new technology’s market cycles, in the same vein Save The Cat argued that every movies are based on 15 essential plot points.
Nairn cofounded Edinburgh Partners in 2003, which had $10bn assets under management as of 2020.
Selected parts of the table of contents:
Introduction: Making Sense of Technology Bubbles
Purpose of the research
Questions raised
The scope of the research
New and updated material
Timeless lesson
Chapter 1: Making Tracks: The Industrial Revolution, canals and railways
Chapter 2: Breaking Out: The story of the US railroads
Chapter 3: Investing at the Speed of Sound, how the telephone changed everything
Chapter 5: Digging Deep, The search for oil
Chapter 6: Driving Forward, the history of the automobile
The search for a horseless carriage
Europe’s first pioneers
The race to attract attention
America takes a turn of the wheel
…
The battle for technology leadership
…
The market begins to formThe impact of Henry Ford
Early attempts to consolidate
…
…
Chapter 10: The Internet
Chapter The Anatomy of Technology Investing
My takeaways are:
As Corry Wang pointed out here, it’s really far from manifest destiny that if a technology turns out to both work & will dominate over all other competing candidates (for example, incandescent electric lighting over gas lighting and electric arc lighting, which is already often uncertain, the value will accrue to the relatively early technology of that technology.
What is a Value Chain
I will be talking about Value Chains on this newsletter a lot, and it is quite relevant to today’s topic, so let’s take a quick dive. Michael Porter introduced the concept in the 70-80s
The industry level value chains we are interested in is about how different entities play different role in a system to bring value to the end consumer / paying customer. For example, buying a bottle of coke already has a deep value chain that involves Coca-Cola, the retailer, the bottler and the advertising & media industries. The famous Porter’s five forces analysis, dating back to 1979, is a framework for asking how likely is a certain part / parts of a value chain capture value.
In the software age, this is known as Commoditize Your Complements1, simply put, you want the rest of the value chain to capture very little value, so that you can get more of it. The assumption being that there’s only so much consumer surplus to be had in a given value chain at a given time. First bought up in 2002, it was elaborated on by Gwern in 2019. But the same logic applies to most verticals, and it more or less comes down to not having serious competition, or an oligopoly of a few big players.
Value Capture / Spill over
So coming back to technology investing, the question is exactly why should we expect the new technology that we are investing in would end up capturing a disproportionate cut of value it creates / unlocks ? This seems to be a question that wasn’t seriously asked all that often throughout history, over all 10 technologies that Nairn showed us. Even patents didn’t seem to work all that well, as was seen in the Edison & electric lighting case study. It is quite shocking how difficult it is to truly capture a lot of value, even in cases like the Telegram and then the Telephone.
Often the technology in question did create tremendous value, even far beyond the most optimistic case, but those values are captured by someone else. A great example is McDonald’s benefitting immensely from the US interstate highway system, and is worth over 2x GM, Ford’s successor company, and we all know that McDonald’s has never flirted with bankruptcy. Part of its success was particularly no investors saw the automobile for the first time, and decided they should pour massive amount of capital into burger joints. The same goes for Amazon’s early days, and Lyall Taylor has a great article on this cost of capital / liquidity flywheel dynamic.
Early may not be the best timing
Much related to the value capture question, an investor adds value predominantly by providing capital, a point so obvious I feel dumb pointing it out. But that means you want to provide it when everyone else is wrongly choosing not to, or wants to, but can’t, for example, when they are constrained by not having cash and access to credit. Apple was a great investment anytime in the last 40 years with hindsight, but it was an excellent investment when it traded for less than its net cash 2.
The book has great charts that shows each technology champion’s fundamentals & stocks prices over a long timeframe, below are for General Electric - founded by Edison to monetise electric lighting.
4.14 – General Electric: the early years Source: General Electric annual reports. CRSP, Center
Source: General Electric annual reports. CRSP, Center for Research in Security Prices, Graduate School of Business, University of Chicago, 2000. (Used with permission. All rights reserved. www.crsp.uchicago.edu.) Commercial and Financial Chronicle. New York Times.
4.15 – General Electric: endlessly re-inventive Source: General Electric annual reports. CRSP, Center for Research in Security Prices, Graduate School of Business, University of Chicago, 2000. (Used with permission. All rights reserved. www.crsp.uchicago.edu.) Commercial and Financial Chronicle. New York Times.
(Both are lifted from the book)
Note how the company did only so-so relative to the US market for the first ~100 years in price. and subsequent outperformance likely has nothing to do with the electric light bulb. Investing during a recession is often great as it fosters a consolidation phase, reducing competition.
Another aspect of technology investing is a fairly long timeframe is usually discounted back into the present, implicitly assuming that a superseding technology wouldn’t come too soon, which has turned out to be wrong for the canals, telegrams and other technologies the book covered.
Conclusion
I am only ~30% into the book on Kindle - but this is essential reading in my opinion for technology investing.
Ongoing investments / rebalancing
Bought more Virtu as it dropped after earnings, and added to my SBM (Gold miner) holdings given it still seems cheap.
And don’t I look like an idiot with my Interactive Brokers pitch in the last letter now that Robinhood is up ~50% a week after its IPO ?
Reading lists:
Lillian Li’s informative take on the intent and tipping point for Chinese tech regulation:
The complete letters of Nomad Investment letters, you know they have made it because it’s hosted on a foundation’s website, which is donating away one of the two founders’ wealth (the other founder has a separate foundation). Under the Investing tab. Here’s an introduction. TL;DR they returned 921.1.%, or 18.4% per annum after performance fees over 12 years, and invested in Costco and Amazon. Not a light read at 245 pages, but 18.4 % per annum, featuring investments as far from Costco, Amazon, a UK bus operating company to Zimbabwe is a really good pitch.
Coined by Joel Spolsky Strategy Letter V
i.e. Less than current assets - total liabilities, basically scrap value , the market is basically pricing in management destroying even the company’s cash pile, beyond just its enterprise value like its brand and ongoing income. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/net-net/