Engines That Move Markets (2nd Ed)
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.