By the mid-1870s, almost 40% of American railroad bonds were in default and by 1879 some $234m ($19bn) had foreclosed. In the six years up to 1879, it is estimated that European investors alone lost some $600m ($50bn) as a result of bankruptcies and fraud. (查看原文)
The Internet has spawned scores of individual millionaires, but we are still adding up whether investors in aggregate will prove to have made money from the technology, given how much capital was committed to its development. The past experience of the railways, motor car and aircraft industries is salutory in this respect. Many of the potential gains from these new technologies were competed away through a surfeit of investment, to the benefit of consumers but at the expense of investors. (查看原文)
The winners of these competitive struggles are not always those who have the best technology, but those who can most clearly see the way that an industry or market is likely to develop. (查看原文)
Thanks to the Model T, Ford was able to achieve and sustain compound returns to its investors of more than 50% per annum for nearly 20 years. Unfortunately, the company was so successful financially that it was entirely self-financing throughout this period. Only the initial investors who participated in its first fundraising in the early 1900s enjoyed the benefit of these returns (but note that this company was the third that Henry Ford started, the other two having failed). (查看原文)
10. Understanding technology is a vital component of generating superior returns – but investing in early-stage technology companies is a losers’ game (查看原文)
Almost without exception, all periods of speculative excess in financial markets are assisted by easy money and brought to an end when interest rates start to rise once more. (查看原文)
In aggregate, over a very long period of time, there is no question that, for all their economic impact, the railways provided negative returns, whether you measure that in real, relative or absolute terms. (查看原文)
Whatever the result, forecasts of profitability for a new technology often overstate its real economic potential, as they ignore the fact that there will be a competitive response. For new entrants, finances are invariably limited, and the inevitable competitive response produces worse-than-expected cash flow. As a consequence, even when the technology actually does prove to be superior, receivership and bankruptcy are still frequently the result. (查看原文)
In the early phases, lamps which cost $1.40 to manufacture were sold at $0.40. The simple reason was that they had to be held at competitive price levels until such time as the industry was established and the infrastructure built out sufficiently to allow economies of scale to kick in. This loss-making price was held constant for an extended period and it was a number of years until the production cost finally fell to $0.22 and both positive cash flow and profits could be recorded. This was achieved only after capital expenditure exceeding $50m (nearly $4bn). (查看原文)
Any technological advance which requires huge capital expenditure always runs a real risk of disappointing returns in the early years, even if it is ultimately successful. Where companies have overextended themselves to fund such expenditure, then typically during the first period of general economic difficulty they find themselves at the mercy of capital markets. These markets do not show mercy and the rationalisation process which takes place does so at valuations which reflect the balance of power rather than future long-term prospects. The biggest and most successful lighting companies all experienced a change of control when cash flow became an issue. (查看原文)
The story of the development of the automobile is a story of two great issues. The first concerned which of three rival technologies would emerge as the source of power for self-propelled vehicles. Although the petrol-powered internal combustion engine would ultimately emerge as the winner in this race, seeing off the challenge of steam and electric power in the process, the issue took several years to be resolved. The second issue was which of the hundreds of companies that set out to make and sell cars would succeed in establishing long-term viable businesses. A third, more tangential, issue was whether leadership in the automobile industry would be seized by the United States or by Europe. Investors at the time had to weigh up all three of these issues. (查看原文)
Between 1900 and 1908 nearly 500 automobile manufacturers entered the industry – and more than 250 exited. Within the same period, nearly 100 companies both entered and exited the industry in the same year. (查看原文)
Interestingly, although there was a large number of entrants and departures from the industry, from the very early days production was concentrated in the top 20% of producers. As can be seen in figure 6.10, the top 18 companies represented roughly 20% of the number of producers and over 80% of the output. This level of concentration was to remain but with two caveats. First, the total number of producers shrank through consolidation and failure. Second, many of the early top 20% of companies were displaced; it was only as demand grew over the next ten years that a ‘top’ place became relatively entrenched. (查看原文)
As can be seen in the accompanying charts, despite continuous price reductions, the company’s return on assets continued to exceed 60% up to 1914, with stable margins causing both sales and net income to grow at an annual compound rate in excess of 65% in the same period. As a consequence of the underlying profitability, Ford was able to self-fund its expansion without recourse to additional equity or debt capital. (查看原文)
The root cause of lagging growth was Studebaker’s lack of exposure to the low-priced automobile, which was by far the fastest growing segment of the market. (查看原文)
While production in the early years had concentrated on high-cost, high-margin vehicles, as the technology improved and the car became a product also for the middle classes the production process itself grew in importance. The economies to be gained from mass production militated against a large number of producers and the industry began an inexorable move towards consolidation.
Consolidation continued from that point forward. The initial very high returns on capital for the fortunate few gradually reduced, even as the consolidation took place, and the rate of growth in net income for participants was on a downward path almost from the 1920s until the 1970s – when, in real terms, profits followed the classic boom-and-bust cycle of a highly capital-intensive and competitive industry. (查看原文)
