It pays to be better, not necessarily first

By DAVID MOON, Moon Capital Management, LLC
August 7, 2011

General Electric president Ralph Cordiner declared the television the biggest consumer flop last year, saying that to operate today’s new high tech gadgets, “you’ve almost got to have an engineer living in the house.”

The year was 1955. The “new technology” was color.

The accessibility of programming was one problem. In 1955, NBC was proud of its one hour a night of color programs. And it was the network with the kaleidoscopic peacock touting its color programming.

The other problem was price. The lowest priced color sets in 1955 were $700, compared to an average family income of $4,400. One shopper in a Rich’s department store in Atlanta was quoted in Time magazine: “I know the grass is green at Ebbets Field. It isn’t worth $700 to found out how green.”

Color TV seemed to have eventually worked out OK.

Bank ATMs similar to today’s versions began appearing in England in the mid-1960s, but it was Luther Simjian, working for a predecessor to Citigroup, who patented and installed a “hole-in-the-wall” bank machine in the 1930s.

There was little demand for the machine. Of course, there was little demand for most banking services during most of the 1930s.

Bill Gates didn’t invent the Windows operating system (Douglas Engelbart did), nor did Steve Jobs invent the computer mouse. (That was Gary Killdal’s creation.). Gates and Jobs each just eventually capitalized on the technologies.

Investing is the same way. You don’t have to be first. You need to be smart and execute well at the right time.

Many investors spend inordinate energy trying to find the “next big thing.” I first saw this in the 1980s when a client gave a significant amount of his money to a Knoxville couple who claimed to have cured breast cancer in cows. I was not aware that bovine breast cancer was such a big problem. I sure wouldn’t have predicted that a husband and wife from east Knoxville would have been the ones to solve it.

They weren’t. The client never saw a nickel of his money again.

There are early investors in companies like CTI and EchoStar who make boatloads of money. They are the exception. A very small exception.

Some investors make the mistake of basing their investment decisions on nothing more than simply buying last year’s winners.

Others make the similarly naïve mistake of avoiding an investment solely if its price has increased. They are afraid they missed that boat, so they start looking for the next ship before it leaves the harbor – or before the ship is even built.

When Walmart’s stock price first doubled, then doubled again in its first three years as a public company, many investors were leery of buying the stock - simply because the price had risen.

The price rose another 1,600 percent in the next decade.

And Walmart didn’t invent a thing. It simply improved on Kmart’s every day, low price business model.

You do remember Kmart, don’t you?

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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