Consider, Xerox, was moon bound for over a decade before Canon and Kodak gave them a run for the roses. Later on, Coca-Cola and Gillette lost their edge, too. Xerox survives as an also-ran conglomerate selling around 10 times earnings. Nobody cares. Today, Facebook holds nearly half the world’s eyeballs as users. Their R & D budget as a percentage of revenues is as high as I’ve ever seen for a major player, around 20% of revenues. Hopefully, it yields productivity.
Compared with Xerox’s peak valuation, Facebook is a bargain growth stock. At its peak, year-end 1972, as the fifth largest position for Morgan Guaranty Trust, Xerox sold at 48.9 times earnings, a 166% premium over the S & P 500 Index. Xerox and Polaroid made the spend, then struck out. Nothing’s forever.
Decades ago, I had a standing bet with my head trader. Before the animals came out of their cages, He’d call the market, thumbs up or thumbs down. This would go on for 250 trading days, and I’d invariably come out on top.
I thought of this caper while watching GameStop and its ilk jitterbugging some 25%, intraday. I don’t know day traders who’ve gotten rich or even held onto their gelt. Rather, you look to latch onto stocks with great franchises, like Facebook and Apple. As their stories unfold and bloom, you buy more, hopefully holding on maybe forever.
But stats prove that the average life for a growth stock approximates 5 years. Few stories run true for even a decade. American Express fluctuated wildly in the financial panic of 2008-’09, touching down at 10 bucks, now ticking valiantly at $162.
Warren Buffett, actually, has underperformed his benchmark, the S & P 500, these past 5 years or so. Too overweighted in bank stocks and missing internet and e-commerce plays like Amazon, Facebook and Alphabet. He came late to Apple, but not too late. This is a 23% position in Berkshire Hathaway’s portfolio a big winner neatly covering the market weighting of technology in the S & P 500 Index. One helluva stroke.
As a struggling junior securities analyst, I was never attracted to single digit stocks. Easier for $50 stocks (then high priced) to elevate than $5 paper. I owned Polaroid and Xerox, expecting to compound my capital at least 2%, monthly, for several years. This proved much too conservative.
Edwin Land, headman at Polaroid, would perform his show-and-tell caper at Polaroid’s annual meeting, held al fresco, in an open Boston park setting. Steve Jobs, at his annual meet, imitated Land, holding up Apple’s new I phone for all to see while he lauded its many features.
You gotta be early. I learned this in the 1960ies with Xerox. Polaroid actually was a great stock throughout the fifties, before my time. I was on hand for the unveiling of Haloid Xerox’s 914 machine, an upright, designed for highspeed copying. There were a couple of portable “wet” copiers around, messy to use, and they fell by the wayside. I shorted these ragamuffins and made some change.
The Xerox story for me was being in the right place, right time. I’ve always regarded serendipity as a powerful force, but I’ve been told by much smarter guys than me that serendipity is overrated. It’s your capacity to extrapolate on a theme that counts. Don’t be passive.
My encounter with Xerox’s office copier, the 914, preceded my experience with Xerox as a stock. Ralph Reis, my neighbor in the next cubbyhole on E.F. Hutton’s research floor was a Rochester boy with a chemical engineering degree from MIT. Ralph prevailed upon Kent Damon, head of finance, to direct one of the first 914 copiers be installed in Hutton’s offices.
The 914 was metered and within hours we noted secretaries flocking to the copying room from distant floors at 61 Broadway. The 914 spit out clean dry copies on white paper at a rate of 6 to 7 a minute, an unheard-of phenomenon.
At day’s end Ralph would check the meter, then go back to his semi-logarithmic paper to extrapolate Xerox’s revenue momentum. Next few weeks, the 914’s counter mounted in an arithmetic progression. Then, the game ended. The overhead partner, an anachronism in a double breasted suit vintage 1929, locked down the machine. At 5 cents a copy the machine was a troubling overhead expense to him.
Reis despaired. How could you extrapolate numbers if administrative heads were bent on choking off copying in its infancy?
“This is a disaster,” Ralph moaned.
“I’m not so sure,” I said.
“Why not?”
“Did you catch that flock of secretaries feeding the machine?”
“Xerography is too expensive”, Ralph answered. “They’ve got to cut cost per copy.”
“They’ll figure it out,” I said. “Remember, Damon told us the learning curve on the 914 is early on.”
“It’s bearish,” Ralph cried.
“No! No! I’ve got it. Banning the machine is the most bullish scenario you could possibly call for. Go back to your log paper and extrapolate enormous worldwide usage. The stock’s going to the moon. Every office in the country will have its own 914 copier”.
I pounded the table, then broke a pencil in my fist while crushing ice cubes in my mouth. Ralph’s eyes lit up. Smart, hungry analysts pounce on basic insights early on.
Martin Sosnoff and his managed accounts own: Facebook and Amazon.
Disclosure: I am/we are long FB.
Additional disclosure: Amazon, Facebook