Engines That Move Markets (2nd Ed) Read online

  Engines That Move Markets

  Technology Investing from Railroads to the Internet and Beyond

  Alasdair Nairn

  Second Edition

  “The four most expensive words in the English language are ‘This time it’s different.’ ”

  Sir John Templeton

  For Siobhan, Hannah, Alexandra and Lochlann

  Contents

  Acknowledgements

  Foreword to the First Edition by Sir John Templeton

  introduction

  Making Sense of Technology Bubbles

  Purpose of the research

  Questions raised

  The scope of the research

  New and updated material

  Timeless lessons

  chapter 1

  Making Tracks

  The Industrial Revolution, canals and railways

  Introduction

  Funding the Industrial Revolution

  The heyday of canals

  The new production technology is adapted for transport

  Responding to the threat

  Success not guaranteed

  Optimism and gearing

  Heroes and villains

  How the boom ended

  Conclusions

  chapter 2

  Breaking Out

  The story of the US railroads

  Beginnings: boats, barges and horses

  Vanderbilt and America’s steamboat wars

  Towards a rail network

  A game of monopoly: the fight for Erie

  The rule of law – or corruption?

  Competition and consolidation

  The battle for control of the West

  The railroad wars intensify

  Competition of the transcontinental route

  Conclusions

  chapter 3

  Investing at the Speed of Sound

  How the telephone changed everything

  Origins of the telegraph

  The British experience

  Western Union and the US market

  Competitors emerge

  The emergence of the telephone

  From prototype to commercial development

  Western Union changes tack

  The importance of patents

  Competition arrives

  The market matures

  Enter Theodore Vail

  Conclusions

  chapter 4

  Lighting Up

  Edison and the electric lamp

  The search for illumination

  Gas: a comfortable monopoly

  The development of electric light

  The Brush stock market bubble

  The roots of arc lighting’s failure

  Next step: the incandescent lamp

  Thomas Edison enters the field

  Maintaining an interest in both camps: diversifying risk

  Propaganda and confidence

  On-off enthusiasm in the markets

  Edison’s corporate ventures

  Westinghouse and the AC/DC wars

  The industry consolidates

  Conclusions

  chapter 5

  Digging Deep

  The search for oil

  Edwin Drake’s discovery

  The floodgates open

  Rockefeller takes a grip

  From participation to domination

  The world beyond Pennsylvania

  New industry combinations

  Public opinion turns against Big Oil

  Trustbusting – the dissolution of Standard Oil

  Conclusions

  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

  Enter the Duryea brothers

  The battle for technology leadership

  The Lead Cab Trust

  The market begins to form

  The impact of Henry Ford

  Early attempts to consolidate

  Durant joins the fray

  The Studebaker story

  The evolution of the automobile industry in America

  The industry in Europe

  Conclusions

  chapter 7

  Making Waves

  The story of wireless, from Marconi to Baird

  Marconi and the origins of wireless

  From wire to wireless – the technology in context

  Marconi courts the press

  Scientific scepticism

  From demonstration to practicality

  The market starts to develop

  Stock funding, De Forest style

  The Marconi companies

  Government steps in

  Commercial spin-offs from the radio

  RCA – the national champion

  The birth of broadcasting

  Development of the broadcasting industry

  Television: an idea ahead of its time

  Conclusions

  chapter 8

  Making it Count

  From adding machines to mainframes

  The business of counting

  Babbage and his engines

  The cash register rings up

  Big business in counting heads

  The race to find other uses

  The next wave of innovation

  The legacy of Bletchley Park

  Next stop the vacuum tube

  ENIAC and EDVAC

  Up against the funding wall

  Success for the UNIVAC

  The arrival of the transistor

  Computer wars

  Timesharing: an idea before its time

  From mainframes to minicomputers

  Conclusions

  chapter 9

  Processing Power for All

  The rise of the PC

  The roots of the PC

  The birth of Intel

  The calculator – accidental mass market product

  Economic imperatives

  From calculators to the PC

  Creating an industry

  From myth to reality – two new products

  Apple and the search for a user-friendly machine

  IBM lumbers in

  Send in the clones

  Microsoft’s vision

  The PC business in perspective

  chapter 10

  The Internet

  How computing timeshare became a global phenomenon

  Part I: The lure of computer networking

  Something stirs in academia

  Timeshare computing: means to an end

  Nurtured by the military

  Marketing the dream

  From academia to commercialisation

  Enter Cisco Systems

  Towards an electronic post office

  The challenge of access

  Part 2: Commericalising the Internet

  Privatisation was the key

  The rise and fall of Netscape

  Getting access: America Online

  Browser wars

  A new business model

  The Yahoo story

  Google – so much for first-mover advantage!

  The market developed differently

  A pioneering IPO

  Amazon: buying things

  Heading to market

  Facebook: the rise of social media

  Part 3: The Internet bubble in perspective

  A new Industrial Revolution…

  …and a monster stock market bubble

  Inflating the bubble

  Valuation issues

  Web 1.0 (1997–2003): analys
ing the Internet boom

  Out of the wreckage

  Web 2.0 (2008+): a new bubble?

  Part 4: Looking to the future

  Towards a brave new world

  chapter 11

  The Anatomy of Technology Investing

  The persistence of change

  Clear in retrospect, but rarely in advance

  The technology cycle

  What works and what does not

  The economic impact

  The Internet and the technology cycle

  The market impact of the Internet bubble

  The misallocation of capital to telecoms

  Where we are today

  The broader impact and the future

  Timeless lessons about technology investing

  Publishing details

  Acknowledgements

  Entering into a venture such as researching and writing this book while in full-time employment was not something that I did lightly. I took the decision at the height of the Internet bubble of 1999–2000. The driving force behind it was the frustration I felt in respect of what was happening in global stock markets at the time and the dangers this was likely to present for investors. In all likelihood the frustration I felt with stock market gyrations was soon matched by that of my family as I disappeared off to work on ‘the book’. For nearly 18 months I was posted missing and without doubt I owe a large debt of gratitude to my wife for putting up with me for this period. Nearly 20 years later, for this and many other reasons, the debt of gratitude has only grown.

  The book itself could not have been written without the assistance of an individual with an ability to unearth information that is simply unrivalled. Murray Scott gave up much of his spare time to help me gather the historic financial information and put it in a useable form. It is difficult to give a flavour of just how much information had to be collected – suffice to say that it reached the ceiling of the room in which it was stored. What Murray was able to find was incredible and testament to his tenacity in chasing down information. In this he was aided by an outside world of librarians and archivists who typically provided enthusiastic support in the search for lost or forgotten documents. You are a wonderful group of people – thank you.

  I would also to thank those who looked at various manuscripts, including Gordon Milne and in particular Jonathan Davis, who has edited, corrected and improved many versions of the text, including this second updated edition. The pair of us have since collaborated on a second book, Templeton’s Way With Money, and a third is now in preparation. The fact that we are still working together after all this effort is a wondrous thing and a testament to the pleasures of collaboration.

  I would like to extend my heartfelt thanks finally to Myles Hunt and Christopher Parker of Harriman House who, together with other unheralded colleagues, have shepherded this new edition into print with consummate patience and skill.

  Foreword to the First Edition

  by Sir John Templeton

  Founder of the Templeton Investment mutual funds and of the Templeton charity foundations

  There has never been a better time to be alive than today and we should count our blessings for this good fortune. I remain optimistic as to how the future will unfold – but that does not mean that one should not be careful when making investments. The river of good fortune may be flowing in our direction but we must plot a careful course through the rapids that threaten to upturn our boat. We must remain patient, flexible in our outlook and always aware that eventually all securities and assets will be priced according to their future earnings.

  The impact of expectations underpinned by emotion adds up to a trend on stock markets. Those who attest to the singular nature of our current bull market – or, for that matter, any bull market – really ought to know better. The lessons of history are very clear in this regard. All bull markets come to an end, typically when people are most optimistic about the future, and they are followed by bear markets which similarly reach their conclusion when sentiment is at its most negative.

  As George Santayana said, those who do not remember the past are condemned to repeat it. In this important new book, Sandy Nairn, my friend and former colleague, looks at old technologies when they were new, in order to see how they were received at the time and how events unfolded as the technology was deployed. The aim is to try and set what is happening today in the context of previous technological breakthroughs. What is unique about this book is that he has extensively researched global archives to find out what the press actually said at the time and how share prices responded. Many new technologies changed the way we live. Whether it was the railroads which opened up the Great Plains of America and helped change an emerging nation into the world’s greatest economic power in 50 years by revolutionising the transportation of goods and people; whether it was the telephone which changed communication forever; or whether it was the computer that created whole new industries – they all shared common characteristics. It is these common characteristics which Sandy has tried to highlight and place in the context of the time.

  Like myself, Sandy is an investor who believes that investing in the stock market is an activity that calls for great patience and fortitude. To make superior returns the investor has to be prepared to act against the consensus and invest when sentiment is extremely negative, or, as I prefer to call it, at the point of maximum pessimism. Likewise, he must be prepared to sell when the levels of optimism are excessive.

  In recent times it has become apparent that many prices for stocks have been pulled along by the increasing optimism of the longest bull market in post-war history, to the extent that their market prices are far in excess of their intrinsic worth. Hopefully the reader will understand this better by reading through the examples in this book.

  Three years ago, Sandy cast around for research on the duration and magnitude of global bull and bear markets. He was surprised to find that in spite of the huge volume of investment literature, such research was not readily available. Undaunted, Sandy set about constructing his own study. The results confirmed what many value investors already knew. First, it is better to be in the market than out – over the long-term, world stock markets rise. Secondly, although on average a bull market is four times greater than bear markets, there is no set pattern that allows simple prediction of when a bull market will end.

  The genesis of the book lay in Sandy’s desire to see what lessons could be learned from history – not just the statistics, but also the prevailing social attitudes. He has sifted through the archives in a bid to capture the atmosphere surrounding each new stock market boom. What were the common aspirations in early 19th-century England, or late 19th-century America? What investment opportunities generated enthusiasm?

  Placing these historical market movements in context is important. It is helpful to remember that a market index is no more than the aggregate changes in prices of shares that comprise it. In order to come to an understanding of the intrinsic value of a security, the value investor’s main areas of focus should be estimated future earnings and the environment in which these companies are operating.

  Hence, this book – an examination of the technological change in the context of the time. Sandy focuses on a number of economic milestones – electric light, the railroad, oil, the automobile, the telephone, the radio, the semiconductor, all of which have changed our world. In itself, the text would be engrossing enough. Sandy examines the ingenuity of the entrepreneurs of bygone years – how they struggled to develop their products and markets.