The Fall of a Giant

LONDON -- These days, most investors, me included, would say that high-quality blue-chip companies should make up the core of your investment portfolio. We are blessed with a market where a range of great blue-chip businesses are priced incredibly cheaply.

Throw in some impressively high yields, and it looks like you can't go wrong. We would expect a portfolio of blue-chip high-yielders to produce both dividend income and capital growth over the next decade and more.

But I would warn that it isn't always as simple as that. Giants can rise, but they can also fall. Take the example of Sony (NYSE: SNE  ) .

An illustrious history
Sony was founded in the wake of World War II by Masaru Ibuka and Akio Morita, from an electronics shop in a bomb-damaged department store building in Tokyo. Over the 60s, 70s and 80s, the company developed into one of Japan's industrial champions, playing a key role in the Japanese economic miracle of the time.

Back in the 1970s, the Japanese were seen as making cheap and inferior copies of Western products. Sony was perhaps the one brand, above all others, that transformed that reputation.

By the late 80s, Sony products were being sold all over the world. They had a reputation for being at the cutting edge of technology, and their quality was impeccable. If you wanted to buy the best quality television, hi-fi, or other electronic product, you had to choose Sony.

The Apple of its day
The scientists and engineers at the firm came up with innovation after innovation. In 1979, they invented the Walkman. In 1983, Sony launched, with Phillips, the compact disc, thus transforming the music industry. In the same year, they introduced 3.5" floppy discs, which became the standard for personal computers. In 1994, the first PlayStation was launched, which sold 100 million units in 10 years.

It's hard to imagine it now, but back in those days, Sony was producing hit after hit. It could do no wrong -- it was, quite simply, the Apple (Nasdaq: AAPL  ) of its day. People marvelled at Akio Morita's vision in the same way that people talk about the vision of Steve Jobs today.

Sony's rise coincided with Japan's rise, and also with the incredible bull market in the Japanese stock market. As Japan boomed, Sony's share price went through the roof.

The first mistake
By 1989, the total value of Japanese companies represented an astonishing 42% of global market capitalization. Sony had become hugely valuable, and thus hugely powerful. It used its power to buy CBS Records in 1988 and Columbia Pictures in 1989. It did so in the pursuit of "convergence," linking film, music, and digital electronics via the internet.

This pursuit turned out to be misguided, and it was Sony's first strategic mistake. But, nonetheless, the business continued to be successful through the 90s. By 2000, Sony was valued at $100 billion and remained one of the world's leading companies.

A turning point
If I had to point to one day that marked the beginning of Sony's decline as the worldwide leader in technology, it would be October 23, 2001. On that day, Steve Jobs, sporting his trademark turtleneck jumper and jeans, took to the stage to unveil the next revolution in music: the iPod.

In one fell swoop, Apple stole from Sony the mantle of "the world's greatest technology innovator." Since that day, the boys from Cupertino have never looked back and have been innovating like there's no tomorrow. At the same time, Sony seems to have lost the knack of producing stunning, game-changing products. It is now just another big, bureaucratic conglomerate.

In contrast to the great success of the first two generations of the PlayStation, the PlayStation 3 has never made any money for Sony. The business invented the Blu-ray just as it was being made obsolete by the internet. It completely missed the boom in music players and has been slow to develop smartphones.

Handle with care
In 12 years, Apple's share price has increased 100-fold, while Sony's has collapsed to a tenth of what it was. Anyone who bought into Sony during its heyday would have suffered badly. But who, in 2000, could have guessed that the Japanese company would go through such travails? Not me, that's for sure.

The fact is that not all blue chips are as safe as you might imagine. Why? Because, quite simply, things change: Fashions come and go, new technologies emerge, a visionary CEO may be followed by a duffer.

And change is at its fastest in disruptive industries such as technology. Now I understand why Warren Buffett was so reluctant to invest in tech. Don't get me wrong, tech shares can be amazing investments, but their success or failure is hard to predict, and -- because of that -- they need to be handled with great care.

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Prabhat does not own shares in any of the companies mentioned. The Motley Fool has sold shares of Sony short. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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