An Evolve-or-Die Moment for the World's Great Investors

[saltybit]

http://fortune.com/longform/value-investing-warren-buffett-tech-stocks/

[LC]

What’s happening now is a debate about what the drivers of value are—of what constitutes value in the 21st-century economy—and what will drive both the economy and the market forward over the next generation.

 

This is the key questions. IMHO there are only so many intangible asset driven companies that society can handle. By that I mean, there can't be 100 Netflix clones, and nobody to produce TV shows and movies.

[stahleyp]

I don't know why the US doesn't enforce monopoly break up powers for these guys. There would have only been one gas company and one telephone company eventually if they hadn't. If they didn't break it up, perhaps Cleveland (not joking) would now be a NYC or SF type level of wealth.

 

There are reasons that banks can't control more than certain regions. I fail to see why they couldn't do the same for Facebook or whoever.

[Mondegreen]

I don't know why the US doesn't enforce monopoly break up powers for these guys. There would have only been one gas company and one telephone company eventually if they hadn't. If they didn't break it up, perhaps Cleveland (not joking) would now be a NYC or SF type level of wealth.

 

There are reasons that banks can't control more than certain regions. I fail to see why they couldn't do the same for Facebook or whoever.

 

How would you break up Facebook?

 

Before the US Rockefeller empire was broken up there was already legitimate competition oversees. It's just a less scalable business model. In Facebook's case, it is directly beneficial to have your US, European, and Asian friends all using the same medium.

 

The natural "equilibrium" size of a global monopoly has, and will continue to, increase as the world becomes more interconnected. If the point of regulation is to protect the consumer, breaking up Facebook wouldn't achieve that. I think what makes regulating these companies so difficult is that consumers truly benefit from the abuses they commit. One of social medias greatest accomplishments is giving normal people a big voice, how do you simultaneously nurture that and prevent the spread of miss-information?

 

 

[CorpRaider]

Uh make them divest Instagram and/or messenger?

 

This topic reminds me very much of the late 90's. 

[Mondegreen]

Right, but how would that help.

 

Being smaller for the sake of being smaller isn't useful.

[stahleyp]

One way to limit facebook is to limit the amount of users they can have (1 billion or whatever). Naturally, folks would then go to the network that had most of their friends (and their friends would eventually go there). You could also limit it to regions - but give users the ability to have 10 or 20 or 50 connections (or some number) outside of their region. I don't have facebook anymore but most of my friends were in one or two regions (and I'm willing to bet that's the case for most users). You then have difference companies in different regions and then those regions would also prosper.

[Uccmal]

This seems to come up in every new industry.  We have seen it over and over.  As data storage becomes greater, and cheaper who knows what the future will being. 

 

I wouldn't expect the same companies to be dominant in 20 years.  I dont know how they will be upended but it will happen. 

 

Data storage capacity would change the online advertising paradigm, online provacy, and a whole host of things.  Your home server (computer), could download the whole internet, and compartmentalize your online interactions to only those that are absolutely necessary, shielding you from advertisers and intrusive eyes. 

 

The internet is being ruined by commercialization right now,  kind of like Christmas.  I have to clear cookies off my Ipad pretty regularly now.

[nkp007]

Does a monopoly matter if it's in an area that's totally optional (social media) and not required for day to day life?

 

 

[DanielGMask]

Does a monopoly matter if it's in an area that's totally optional (social media) and not required for day to day life?

 

FB and Google are not monopolies because they are partnering with other companies to be on top of their competitors, nor because they can pay more than others or because they are the only toll bridge communicating the island. They are good at what they do and people go to them instead of going somewhere else. Talking about breaking up a company just because it’s big is not a capitalist view of the world, actually that’s a dangerous view of the world!

[Dalal.Holdings]

One way to limit facebook is to limit the amount of users they can have (1 billion or whatever). Naturally, folks would then go to the network that had most of their friends (and their friends would eventually go there). You could also limit it to regions - but give users the ability to have 10 or 20 or 50 connections (or some number) outside of their region. I don't have facebook anymore but most of my friends were in one or two regions (and I'm willing to bet that's the case for most users). You then have difference companies in different regions and then those regions would also prosper.

 

Sounds absolutely ridiculous.

[vinod1]

Monopoly and Anti-Trust arguments are a complete non-starter. The link below has a summary of the key laws in U.S. related to Anti-Trust.

 

https://www.justice.gov/atr/file/800691/download

 

If you can make a case for why Google or Facebook are price gouging consumers, then Anti-Trust laws would apply. If you are looking for weak points in these companies, Anti-Trust would not make it into the top 5 worry list in U.S.

 

Vinod

[vinod1]

For those of us who have memory of the 2000 tech bubble, it is easy to imagine a bubble whenever you see tech or other companies sporting high multiples.

 

I agree with the article above, I pretty much came to a similar conclusion a couple of years ago. For the diehard value investors, this would be just one more sign of investors capitulating to the latest fad.

 

I would urge you to just consider the possibility that maybe, just maybe, you might be wrong.

 

Vinod

[Dalal.Holdings]

For those of us who have memory of the 2000 tech bubble, it is easy to imagine a bubble whenever you see tech or other companies sporting high multiples.

 

I agree with the article above, I pretty much came to a similar conclusion a couple of years ago. For the diehard value investors, this would be just one more sign of investors capitulating to the latest fad.

 

I would urge you to just consider the possibility that maybe, just maybe, you might be wrong.

 

Vinod

 

One major difference is that it seems that unlike in 2000, Warren Buffett has jumped into tech this time (he largely sat out of it back in 2000). I think that's a significant difference and indicates a real change afoot. The network effects of FB, the moat of Alphabet, and the ecosystem/halo of Apple products is unlikely to disappear overnight like the popularity of tech companies circa 2000. These companies are producing real profits this time--and at high margins and asset light rates. Sure, competition will enter and disrupt, but tech in general is here to stay (and is embraced by mass market consumers now).

[rb]

I suppose that WB sees these companies like Google as the media companies of last generation - Cap Cities/ABC. They do bear striking similarities if you're familiar with WB's thinking in the 70s.

 

But these companies have to behave. Trolls, bots, and fake news are a problem. The old media companies didn't have problems like theses. If the problem gets too big it doesn't matter if it doesn't make sense to break them or what's the best way to break them. They'll do it with a cleaver and let them figure it out afterwards.

[scorpioncapital]

Monopolies are not so great if they are regulated , where there are not above average growth opportunities. On the other hand, a monopoly that is not regulated, that is in fact not a monopoly except for say network efffect is far more lucrative.

[stahleyp]

I'm not sure how "dangerous" it is to break up huge companies. I think it's more or less dangerous to let companies get too big (and hence one of the reasons the country is so divided). I'm opened minded to this and willing to listen to other arguments though.

 

Let's do a thought exercise and say the GDP was running at 10% a year but all of the economic production was in, say Rabbit Hash, KY by one or two companies. Sure the economy would be better overall but most of the country wouldn't be better off (mostly consisting of government handouts and no or little work).  And by "better off," I don't mean free streaming movies but a with a job and life you can be proud of.

 

There are a couple ways to look at companies and the economy. One is from an investor's perspective and the second is from a general stakeholder (or we'll just say society).

 

Does anyone here really think the country would be worse off if Facebook or a similar company never existed  (though I'm sure shareholders will argue here!)? There is plenty of research that shows Facebook makes people 1) unhappier 2) less productive

 

Now, as an investor of Facebook (well, if one bought at lower levels), you're probably thrilled with the results. However, the product...err users of the service are actually experiencing some of negative returns that I mentioned earlier. On top of that, Facebook is taking up huge resources (talent that could be better serving the country than trying to make people click on more ads). At least with cigarettes, jobs were being created!

 

Now, if facebook were sectioned off in regions or something along the lines, at least the economic benefits would be a bit more diverse. Right now, the only major benefices are the shareholders and Menlo Park. We can keep playing this game of the rich get richer and the poor get poorer, but I don't think anyone will like the end of the story.

 

The stock market has treated me pretty well but I can see a lot of my family struggling. I grew up in small town America and I'm sure that's coloring my views.

 

 

 

[Dalal.Holdings]

I'm not sure how "dangerous" it is to break up huge companies. I think it's more or less dangerous to let companies get too big (and hence one of the reasons the country is so divided). I'm opened minded to this and willing to listen to other arguments though.

 

Let's do a thought exercise and say the GDP was running at 10% a year but all of the economic production was in, say Rabbit Hash, KY by one or two companies. Sure the economy would be better overall but most of the country wouldn't be better off (mostly consisting of government handouts and no or little work).  And by "better off," I don't mean free streaming movies but a with a job and life you can be proud of.

 

There are a couple ways to look at companies and the economy. One is from an investor's perspective and the second is from a general stakeholder (or we'll just say society).

 

Does anyone here really think the country would be worse off if Facebook or a similar company never existed  (though I'm sure shareholders will argue here!)? There is plenty of research that shows Facebook makes people 1) unhappier 2) less productive

 

Now, as an investor of Facebook (well, if one bought at lower levels), you're probably thrilled with the results. However, the product...err users of the service are actually experiencing some of negative returns that I mentioned earlier. On top of that, Facebook is taking up huge resources (talent that could be better serving the country than trying to make people click on more ads). At least with cigarettes, jobs were being created!

 

Now, if facebook were sectioned off in regions or something along the lines, at least the economic benefits would be a bit more diverse. Right now, the only major benefices are the shareholders and Menlo Park. We can keep playing this game of the rich get richer and the poor get poorer, but I don't think anyone will like the end of the story.

 

The stock market has treated me pretty well but I can see a lot of my family struggling. I grew up in small town America and I'm sure that's coloring my views.

 

This mentality is pretty much a great example of why Europe has fallen behind the U.S. in tech innovation. Who's going to oversee and implement these great policies? Let's have some bureaucrat in Brussels tax memes and other "dangerous" activities for our users that cherry-picked studies from our prestigious institutions have shown is "bad for your health". Was broadcast TV also bad for your health? Shouldn't we also ban tabloids as well?

 

Then we can take that tax revenue, cripple our tech companies, and form an elaborate pension scheme. We can all become chain smoking (do studies show cigarettes are bad too?) Parisians who have to fight in the streets against the Fifth Republic to get a pay raise or keep our precious pensions. Meanwhile, we can cry foul at the tech companies from across the Atlantic that seem to, for some reason, be all the rage in our "competitive", "mentally healthy" country as deemed by Brussels.

 

:o

 

Tech companies, like those in FAANG, are now the U.S.'s greatest export across the planet. Its equity holders (with stakes valued in the trillions of dollars or above 15% of GDP) include ordinary state pension funds, index investors (they make the largest portion of the S&P due to market cap), and ordinary, largely U.S. citizens. The U.S. benefits tremendously from having these companies. There are hordes of companies that benefit from the "free" advertising they get on social media platforms, a number of empires started on AAPL's app store.

 

Crippling this would be like killing the goose that lays golden eggs.

[Spekulatius]

My prediction is that BRK get’s broken up before GOOG and FB.

[stahleyp]

When was Europe ever ahead of the US in tech innovation? I can't of anytime since the 1800s (but could be wrong about that) that Europe was ahead of the US.

 

I look at the current environment as a certain level of corruption (though I think it's unintentional). The government wants to keep the economy in place (and the powers that be) so they bailed out the Silicon Valley in 2001 and then bailed out Wall Street in 2008.

 

A fair government would let the "innovators" suffer when they fail. But, a fair government doesn't have the economic growth (as if that's the only important thing a country can do) that a more accommodating government has - I suppose. The government will reward risk takers and then bailout when the risk fails. The more prudent don't take as many risks and innovations suffer.

 

As a result of a system that's not functioning properly, the government has to take on huge levels of debt the keep the ship afloat.

[Dalal.Holdings]

When was Europe ever ahead of the US in tech innovation? I can't of anytime since the 1800s (but could be wrong about that) that Europe was ahead of the US.

 

I look at the current environment as a certain level of corruption (though I think it's unintentional). The government wants to keep the economy in place (and the powers that be) so they bailed out the Silicon Valley in 2001 and then bailed out Wall Street in 2008.

 

A fair government would let the "innovators" suffer when they fail. But, a fair government doesn't have the economic growth (as if that's the only important thing a country can do) that a more accommodating government has - I suppose. The government will reward risk takers and then bailout when the risk fails. The more prudent don't take as many risks and innovations suffer.

 

As a result of a system that's not functioning properly, the government has to take on huge levels of debt the keep the ship afloat.

 

They bailed out silicon valley in 2001?? Your premise is wrong...

[stahleyp]

When was Europe ever ahead of the US in tech innovation? I can't of anytime since the 1800s (but could be wrong about that) that Europe was ahead of the US.

 

I look at the current environment as a certain level of corruption (though I think it's unintentional). The government wants to keep the economy in place (and the powers that be) so they bailed out the Silicon Valley in 2001 and then bailed out Wall Street in 2008.

 

A fair government would let the "innovators" suffer when they fail. But, a fair government doesn't have the economic growth (as if that's the only important thing a country can do) that a more accommodating government has - I suppose. The government will reward risk takers and then bailout when the risk fails. The more prudent don't take as many risks and innovations suffer.

 

As a result of a system that's not functioning properly, the government has to take on huge levels of debt the keep the ship afloat.

 

They bailed out silicon valley in 2001?? Your premise is wrong...

 

So the Fed didn't drop interest rates during the internet bubble to "save" the economy?

[Dalal.Holdings]

Dropping interest rates is a far cry from “not letting the innovators fail”. Please try to find the tech equivalents of AIG and GM to back up your argument because so far, you have no argument. Aside from Amazon, none of the FAANG stocks were big names (or even born) as of 2001. Your bailout of 2001 argument just doesn’t work—last I checked, Pets.com and AOL were total failures and the government did not get “involved” to prevent their failure (among many many other tech names in the graveyard from that era).

[stahleyp]

Dropping interest rates is a far cry from “not letting the innovators fail”. Please try to find the tech equivalents of AIG and GM to back up your argument because so far, you have no argument. Aside from Amazon, none of the FAANG stocks were big names (or even born) as of 2001. Your bailout of 2001 argument just doesn’t work—last I checked, Pets.com and AOL were total failures and the government did not get “involved” to prevent their failure (among many many other tech names in the graveyard from that era).

 

None of the faang stocks were born as of 2001 besides Amazon? Apple has been around for decades (publicly traded).  Google was founded in 1998 and Netflix in 1997. So the only one that wasn't "born" was Facebook.

 

Let's assume that interest rates didn't drop in 2000-2002 (from a high of 6.79% to 3.61% in 2002.). It's probably safe to assume the market wouldn't have hit a new high so quickly (the market recovered from a 50% drop in roughly 6 years). If the market didn't recover (and people were still licking their wounds) it's plausible, if not likely that the most of the faangs wouldn't have received the venture capital that they did and wouldn't be around today. How's that not a bailout?

[Spekulatius]

“Bailing out” an economy us very different than bailing out specific companies. Investors in overvalued tech companies were never bailed outend neither were employees who lost their job.