Innovation And Making Money Aren’t The Same Things | Seeking Alpha
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Last year was a cruel one indeed for some popular innovation and disruption-based investment strategies.
(Source: SeekingAlpha.com.)
So many reasons might explain why funds such as the ARK Innovation ETF (ARKK) crashed by roughly 43% from their all-time highs last year. Maybe the fund managers paid too much for the stocks that they bought with their investors’ money? Maybe the fund managers churned the portfolios too much in a spurious attempt to out-think the entire global stock market? Or maybe the recent weakness that we’ve seen in some technology names is simply the pause that refreshes, auguring a promise of lofty new highs for those erstwhile high-flying stocks in companies short on profits but long on potential?
Or… just maybe there is a broader lesson that we can draw when it comes to thinking about investing our money into the most exciting new companies that offer customers the newest technologies that promise to revolutionize the world. If so, then I’d argue that broader lesson goes as follows: making money and inventing cool new stuff aren’t the same thing.
To illustrate my point, I contemplated the five most boring companies that I could call to my memory. That is to say, companies that sell products or services that are remarkably inured to the threat of (or potential for) anything that even approximates innovation. Five companies that could not, would not and should not ever come even remotely close to changing the way ANYTHING ever happens on this planet. Five companies, folks! With products that have not (and probably cannot) change or improve in any meaningful sort of way. Five companies that, quite simply, don’t do anything besides make money selling the same old stuff they always have sold.
What are my five exciting picks for the companies with the dullest products that we all know and love?
(1) Tootsie Roll Industries (TR). Not that I don’t enjoy a delicious, waxy plug of brown chocolate-flavored goo, but last I checked, the greatest candy innovation that this company has conjured over the past 51 years is the Tootsie Pop (which are quite good, aren’t they?) and a curious sort of candy called “wax lips” (which I never tasted and wouldn’t care to try).
(2) WD-40 Company (WDFC). Spray lubricants. You probably have some in your garage somewhere near that rusty tool box that you don’t like to touch on account of the cob webs and sow bugs. To be fair, the company did invent a new type of straw attachment for their cans a few years ago… so I guess that is sort of innovative.
(3) Sherwin-Williams Company (SHW). House paint. Same stuff I used to put on that old picket fence back home. Not much innovation going on there, my friends, but I do like the paint.
(4) McCormick & Company (MKC). Spices. Sometimes the company puts its Old Bay seasoning into a new type of container, but the ingredients haven’t changed since Gustav Brunn fled the Buchenwald concentration camp for the United States in the late 1930s, with nothing but a spice grinder and some ideas for what he called the “Delicious Brand Shrimp and Crab Seasoning.”
When you’ve got a great recipe, you never want to change it if you don’t have to.
(5) American States Water Company (AWR). It’s a water utility. It’s hard to improve on water (let alone innovate it out of existence).
Now for the fun part, folks. How would an equal-weighted portfolio consisting of these five supremely non-innovative companies perform over the long-term against a portfolio comprised of (arguably) the most innovative companies on Earth (including Tesla (TSLA), Microsoft (MSFT), Meta (FB), Alphabet (GOOG) (NASDAQ:GOOGL) and Apple (AAPL)? Let’s find out by back-testing my “blah, ho-hum” portfolio against the Invesco QQQ Trust (QQQ).
(Source: Portfoliovisualizer.com, inputs by author.)
No Way!
According to Portfoliovisualizer.com, the Blah, Ho-Hum Portfolio utterly TROUNCES QQQ from 1999 until today, producing an average annual return of nearly 15% compared to the 10% average annual returns on QQQ. $10,000 invested in the Blah, Ho-Hum Portfolio in April of 1999 would be worth $233,839 compared to $87,533 if you’d invested in QQQ over the same time period.
And wait! That’s not all!
Those explosive returns would have come with far, far, far less volatility. The worst year’s performance for QQQ since 1999 is negative 41.73% according to Portfoliovisualizer.com compared to negative 9.22% for the Blah, Ho-Hum Portfolio. So let’s hear it for that vaguely surreal 12.83% annualized Alpha for house paint, lubricants, running water, chicken and seafood seasoning and chocolate flavored, corn-starch-infused carnauba wax!
(Source: PortfolioVisualizer.com, author’s inputs.)
If you think that buying shares of companies that disrupt and innovate is the only way (or even the best way) to make money as an investor, think again. A company with a timeless niche product that it can produce and sell at durable and high profit margins can make a wonderful, wonderful investment that keeps on ticking over the very, very long run. And so much the better if you happen to own the stocks directly and avoid paying sky-high management fees and capital gains taxes on excessive asset turnover (like you’d have to do if you owned shares of ARKK, for example).
And what about my biases as an author? The best way to divulge those is to divulge every single position I own in my own personal portfolio (which rarely ever changes since I don’t do much investment-wise besides reinvest my dividend savings into whichever company I own that happens to look cheap at the time).
(Source: author’s spreadsheet.)
What am I looking to do with my portfolio next? I plan to purchase more shares of T. Rowe Price (TROW) and Mondelez (MDLZ) the next time I find extra dividend cash sitting in my accounts. I am not saying this to suggest you or anyone else should do the same thing, but am saying it to be transparent about my investment approach in both general and specific terms.