I thought the attached chart, Bytes beat Bricks, from this week’s Fortune Magazine was worth passing along.
On the one hand, the technology industry is tremendously innovative, yet on the other hand, this also means that it can be extraordinarily disruptive. The former hand often explains why the best tech stocks always seem so outrageously priced – because they represent black holes that can suck the entire market cap away from established industries and the status quo way of doing things. On the other hand, it may also explain why long term investors like Warren Buffet often shy away from the space. It just isn’t stable.
While cloud computing is all the rage today, the truth is that the seeds were planted at least ten years ago when Oracle and Sun Micro prophesied the dawning of thin client computing. Now that the internet is fast enough, computer users can leave the annoying hardware maintenance questions to the likes of Salesforce.com and Apple, rather than having to tinker with it themselves. The computing isn’t all that new, but the delivery methods are.
Microsoft was dead right in its defense against anti trust regulators last decade. Technology moves so fast that monopolies in the industry can often be short-lived, a reality that Microsoft faces today as others in the industry significantly outpace it. Oddly enough, regulators are now taking a closer look at Google from an antitrust perspective, just as Facebook turns up the competitive heat.
Tech stocks are expensive because they often unleash tremendous paradigm shifts in the ways that things have always been done. While the rewards of success can be high, so too can the costs of failure.
For investors like Warren Buffett, it’s no wonder that things like Coca Cola and peanut better have longer term allure. They’ve been exactly the same for decades, if not centuries.
