A recent Atlantic Monthly article points to growing evidence that we are becoming a short-attention-span society. While "Is Google Making Us Stupid?" is a bit light on hard science, the article got me thinking.
Is our ultrawired culture creating moat compression, similar to the age-compression phenomenon, in which advertisers need to market products to "kids getting older younger"? Ubiquitous information appears to be leading us into an era in which competition taps into market leadership much more quickly than in the past.
There's been no better example of this theory than the fragmentation and accelerated decline of traditional media franchises. Ignoring this shift has proven quite costly for many investors:
|
Company |
% Decrease* |
Industry |
|---|---|---|
|
Idearc (NYSE:IAR) |
-93.54 |
Yellow pages |
|
Blockbuster (NYSE:BBI) |
-85.82 |
Movie rentals |
|
Gannett (NYSE:GCI) |
-78.74 |
Newspapers |
|
CBS (NYSE:CBS) |
-49.33 |
Broadcast (TV, radio) |
|
Barnes & Noble (NYSE:BKS) |
-48.68 |
Bookstores |
*Versus 10-year highlights.
While Google (NASDAQ:GOOG) tends to serve as the poster child for the entire Internet revolution, the explosion of web 2.0 businesses, including Facebook, News Corp.'s (NYSE:NWS) MySpace, and Twitter, are leading the next wave of competitive-advantage destroyers.
I'm talking drainage
Every value investor has been taught to seek companies with defensible moats. However, competitive barriers are increasingly rare, and far more fleeting than ever. Overnight, a seemingly impressive moat filled with crocodile-infested water can be quickly reduced to an innocuous puddle of tadpoles.
Say goodbye to the days of castles, moats, and war metaphors. Get the imagery of the fierce medieval invaders galloping toward your competitive castle out of your head. Moats have been reduced to milkshakes. Yes, milkshakes.
Many of today's competitive advantages are sugar-filled desserts of fat profits. These excess margins are savory and delicious while you have them, but they're quickly being devoured. The new competitors threatening your companies are, and I mean this with the utmost respect, freckle-faced 17-year-old kids in their rooms with giant silicon straws, intent on drinking up your milkshake.
How is this relevant to Fools?
While value investors classically take a bottom-up approach, it would be naive and reckless not to understand the evolving world in which your stocks exist. One of the most important elements of valuing a business is the ability to, with a reasonable degree of certainty, predict the reliability of that company's future cash flows.
A shorter-attention-span society, fueled by rapidly changing technology, will continue to challenge the stability of many modern franchises, across a number of industries. Gone are the days of decade-long runs of unchallenged excess profits.
The intelligent investor needs to know the difference between normal economic cycles and secular societal shifts, and how that difference affects future earning power.
Will there be blood?
I'm not saying you need to be a futurist or get into the prediction business. But you will need to do some lateral thinking if you're going to outperform the market. You must understand how society progresses, and how to identify Rule Breakers who capitalize on these anthropological shifts, for good or for bad.
They're out there, they're hungry, and if you don't watch out, they're gonna drink your milkshake.
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