Frank Thoughts: The Big Mistake
Frank Boland
April 10, 2023

With most mistakes we make in life, we have no idea of what the immediate outcome will be. There’s just a feeling it will be negative. But in the investment world we often know quickly what the mistake is going to cost us. When that happens, it is unnerving because we now know that the emotional impact of losing money is 2.5x that of gaining it. We always knew this intuitively, but it wasn’t until psychologists Kahneman & Tversky received the Nobel Prize in Economics in 2002 for proving it that we could acknowledge what had previously been just an innate feeling. 

Of course, there are many mistakes that we can make in investing, but there is just one that is the big mistake. That’s buying a stock that was once a darling in a previous bull market cycle that has now declined 40-50% … or more. Obviously, after 12 years of 0% interest rates – with Fed funds having moved higher and interest rates increasingly becoming “normalized” - there are now hundreds of these companies. They are investment “traps.” The reason is because corporations have life cycles just as we do. But theirs is dramatically shorter. Especially in the technology sector.

One could correctly point out that IBM, Hewlett Packard, Cisco Systems, Dell Computer, and Intel still exist. But they all hit the top of their bell curve decades ago. More representative of the shortness of their business cycle are names of what once were large corporations such as Data General, CMGI Burroughs, Control Data, Digital Equipment, Prime Computer, Apollo, Transitron, Unitrode, Solitron Devices, Sperry Rand, Compact Computer, Sun Microsystems etc. And that’s just a few! With close to 60 years in the investment business I could name dozens of them. The “IBMs” that survived are now referred to as “legacy” technology. But legacy has the connation of a gift from the past.  

However, gift doesn’t begin to apply to the price performance of a legacy technology’s stock. Cisco Systems was the ultimate example of a major “hot” stock in what we would describe as the second bull market wave of technology. The first wave was led by IBM, Digital Equipment, Intel et al. in the 1960’s. Cisco then made the internet connection possible in the second “wave.” At the time, it was the Apple Computer of the recent internet bull market. In 2000 we had a sell on the stock at $50. It is now $50. No splits. That was 23 years ago, and when one considers the time value of money … well.

It is our belief that this third technology wave of platform and cloud-based technology companies is over. The experience was unique from past years of technology in that it functioned over a 12-year period of 0% interest rates. This resulted in well over 1,000 privately held Unicorns becoming valued at over a billion dollars each. As has been written before, “when too much money chases too few good ideas, nothing good is the result.” Of those that made it through the IPO process few make money, and most are down 50% or more.  They are the “traps.”

A stock’s parabolic ascent in a bull market often makes the company a Wall St. darling. This results in overestimating its perceived investment value. That’s because the business cycle of innovation in technology is short; it averages just 11.5 years. It’s why there will never be an RH Macy life expectancy in technology. Take it from General Georges Doriot the Harvard Business School professor who awed Wall St. with his IPO of Digital Equipment in 1966. $70,000 invested in 1957 ultimately became worth $400,000,000! A return of 5,000 times. He taught over 7,000 students and every one of them heard the same message. “Someone, somewhere is making a product that will make your product obsolete.”


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