When Long-Term Buy and Hold Goes Wrong

"When technology moves as fast as it does in a civilization like ours, you get a phenomenon which I call competitive destruction. You know, you have the finest buggy-whip factory and, all of a sudden, in comes this little horseless carriage. And before too many years go by, your buggy-whip business is dead. You either get into a different business or you're dead -- you're destroyed. It happens again and again and again."
-- Charlie Munger

LONDON -- We at the Fool have long been supporters of long-term buy-and-hold investing. This is one of our core philosophies, and it has been advocated by investing greats such as Warren Buffett.

But while this is a great idea in principle, it is much harder to implement in practice. The main reason for this is what I call the buggy-whip syndrome.

Change can wreak havoc
As Buffett's partner Charlie Munger explained in the quote above, time and time again, change, particularly technological change, can wreak absolute havoc on companies.

When Tim Berners-Lee launched the World Wide Web in a chilly laboratory in Switzerland on Christmas Day 1990, he surely must have had no idea what huge implications there would eventually be for hundreds of businesses around the world.

The Internet and online shopping have ravaged the high street, sending the share prices of companies such as Dixons Retail, HMV and Game Group tumbling.

Quite simply, it is just so much easier to browse, choose, buy and then pay for a flat-screen TV, a CD or a computer game online rather than trudging all the way down to your local high street.

The Internet did change everything
I remember, at the height of the tech boom in 1999, many were saying the Internet would change everything. Hindsight shows how right they, eventually, were. The onward march of the Internet has had a sense of inevitability about it.

And it's not just high street shops that have suffered. The newspaper industry has been decimated, and high-street travel agents such as Thomas Cook are struggling to survive.

These are all buggy-whip companies. For decade after decade, they have continued to be successful, growing steadily. Shareholders could rely on them to increase their profits and their share prices year upon year. And then, out of the blue, they have been hit by a tsunami.

And when they see the tsunami loom up before them, all that investors can do is run for their financial lives, before they are swallowed up by the great wave of technological and cultural change.

But high-tech is no safe haven
But investing in high-tech firms is also no safe haven as, before you know it, new technology can destroy their market. For decades, Eastman Kodak reigned supreme in the field of photography -- it seemed untouchable. But it failed to adapt to the new world of digital cameras and smartphones and as a result it is now, sadly, history.

Even a company which seemed to be really plugged in to the technology of the future, Research In Motion (Nasdaq: RIMM  ) , has been, in a few short years, overwhelmed and almost obliterated by technological change.

A few years ago, if you wanted to browse the Internet on the go, you would buy a BlackBerry. The technology was quick, convenient and easy to use. Mobile Internet was the future. So, many concluded, Research In Motion was the future.

How wrong they were. The shallowness of RIM's moat, plus the vision of a certain Steve Jobs, led to the BlackBerry developer being overwhelmed by its competitors in the battle of the smartphones. The share price of RIM is now a fraction of what it was, and the group is struggling to turn a profit.

Guess what is my buggy-whip company of the future...
That's why, however successful a business is now, and however illustrious its history, you have to keep your eyes firmly fixed on its prospects for the future. Because change can happen far faster than you think.

Can I think of a buggy-whip company of the future? Well, it would have to be a company which is the hottest thing around at the moment, a company for which people predict a bright future, but a company which is also very vulnerable to the vagaries of both fashion and of technology. Yes, my choice is Facebook (Nasdaq: FB  ) . What's yours?

So, are you looking to avoid buggy-whip companies? Well, one way to do this is to take care as to which sectors you invest in. Do you want to learn about the best sectors to invest in right now? Read our free report on the "Top Sectors For 2012".

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Prabhat owns shares in none of the companies mentioned. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook. The Motley Fool has a disclosure policy.
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