Investing in groundbreaking companies that change their entire industries is a great way to get rich. Luckily for us mere mortals, it's not the only way.
Run with the medium-sized dogs
For starters, not every industry necessarily ends up with a runaway market leader. Think Coca-Cola and PepsiCo (NYSE: PEP) both do quite well in the soft-drink business. While Coke might have the edge in beverages, PepsiCo enjoys the extra edge of being King of Salty Snacks, encompassing brands such as Lay's, Tostitos, Doritos, Sun Chips, Ruffles, Fritos, Rold Gold, Funyuns, Cracker Jack, Smartfood, and even Grandma's Cookies.
Check out how both companies have served shareholders over the long haul:
|
Time Period |
Coca-Cola |
PepsiCo |
|---|---|---|
|
10 Years |
4.5% |
9.9% |
|
20 Years |
11.3% |
12.3% |
|
25 Years |
15.0% |
16.0% |
|
30 Years |
16.4% |
17.2% |
Data: Yahoo! Finance. Percentages represent compound annual growth rate.
In some industries, you'll see one dominant company in tandem with a smaller but still significant rival, a la Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD). Microsoft (Nasdaq: MSFT) and Apple's long-competing operating systems have enjoyed a similar near-duopoly in the software business.
Each industry bears examination on its own merits, but you shouldn’t assume you need to find a superdominant entity to do well. Though Apple likes to cast itself as the David to Microsoft's Goliath, its rapid growth has lifted its market cap much closer to Microsoft's in recent years.
Technology doesn't trump
Superior technology alone isn't always the best judge of potential success, either. In the videotape era, Betamax was considered the better standard, but VHS ended up on top. Similarly, many users preferred Apple's technology to Microsoft's, yet the latter company's operating system ended up dominating the computer market.
Technology can be important, but only if you also factor in competitive advantages and other considerations. Recent articles have questioned the efficacy of Intuitive Surgical's (Nasdaq: ISRG) surgical robots. However, that tech might not be the key factor that has helped investors profit handsomely from this Motley Fool Rule Breakers pick. Peer pressure among hospitals, or the high costs of switching from Intuitive's machines to another system, could be far more crucial to the company's success.
According to a Dow Jones report, management at Boston's Beth Israel Deaconess Medical Center doubted some of the claims about Intuitive Surgical's robots' effectiveness, "but the hospital bought a machine anyway amid competitive pressure."
No shame in a second-mover
Though Fool co-founder David Gardner seeks innovators within their industries as a key criterion of the greatest stocks of the next generation, a company doesn't have to be a first mover to be a big winner.
Jeff Joseph at InvestmentAdvisor.com recently pointed out that Microsoft didn't start with massively popular software or a dominant Web browser. It bought its operating system from another company for $50,000, and few if any of its popular programs were pioneers in their respective fields. Likewise, Pampers didn't offer the first disposable diaper, Boeing (NYSE: BA) didn't develop the first commercial jet, and Starbucks (Nasdaq: SBUX) didn't invent gourmet coffee.
Doing something first can be an advantage, but doing something best is often far more important. Latecomers to a market can still win by finessing the most lucrative deals, offering superior enhancements to the original product, or spreading into regions or distribution systems competitors ignore.
Don't let myths and faulty assumptions derail you as you seek the most compelling investments for your portfolio. Sometimes, settling for second place can still bring you first-rate returns.
