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In his new book Antifragile: Things That Gain From Disorder, Nassim Taleb coins a new word “neomania” to label the mistaken belief that newer is better.
I see many investors afflicted with neomania, and I understand the affliction. What’s new instills a sense of optimism and limitless potential. Getting in on Microsoft’s (NYSE: MSFT) initial public offering (IPO) would have produced a 20,000% gain; Cisco Systems’ (NYSE: CSCO), a 50,000% gain; Intel’s (Nasdaq: INTC), a 15,000% gain if their shares were held to this day. These are the kind of returns that lead to a Malibu home and endless vacations on the French Riviera.
But for every Microsoft, Cisco, and Intel there are hundreds of FreeMarkets, U-Bids, and Onsale.coms. Countless investors could have bought eBay (NASDAQ: EBAY) or Amazon.com (NASDAQ: AMZN) in the 1990s. Instead, countless more bought Webvan.com, Pets.com, and other similar disasters.
The odds simply favor failure when investing in what’s new: Of the 2,000 technology IPOs from 1980 through 2004, a mere 5% accounted for 100% of the $2-trillion-plus in wealth created during that period, according to Stephen R. Waite in his book Quantum Investing. To that, Taleb adds that half the capitalization of the stock market resides in fewer than 100 companies. In other words, a few count for a lot.
Yes, but what about the likes of Linkedin (NASDAQ: LNKD), Facebook (NASDAQ: FB), or even Google (NASDAQ: GOOG)? These companies are, after all, the standard-bearers of their respective industries.
First, I’m leery of any Internet company maintaining its lofty standing. Indeed, Facebook is already showing signs of user fatigue, as MySpace did a decade earlier. What’s more, I’m sure there is some kid somewhere – in a garage or a dorm room – furiously pounding a keyboard to develop a social-media platform to knock Facebook of its perch.
But even if I’m wrong, investing success is still far from assured. Jeremy Siegel explains in his book The Future for Investors: Why the Tried and True Triumph Over the Bold and the New, why new investments are frequently losing investments. Siegel calls it the “growth trap” – the tendency to overpay for shares in fast-growing companies, primarily because investors expect too much future growth.
Many investors appear to have fallen into Siegel’s growth trap: Facebook trades at 20 times revenue. Linkedin trades at an 18 multiple. Google is priced more reasonable, but still trades at over six times revenue. The S&P 500 trades at 1.7 times revenue; the long-term average is 1.4 times.
You’ll notice that the great investors – Warren Buffett, Carl Icahn, Ian Cummings, Julian Robertson – eschew the new. We take a similar tack at High Yield Wealth. The portfolio is composed of investments that have been around the block a time or two. There are no pyrotechnics.
Admittedly, the vast majority of income investments are established companies anyway. Rarely does a new company begin its public life as a dividend payer. But even if it were otherwise, we’d still limit our universe to Methesulah-like issues. The data overwhelming support that what has existed in the distant pace will continue to exist into the distant future.
And we are all for that… as long as the dividends are existing and growing along the way.
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