Regular readers are familiar by now with Horizon Kinetics’ focus on qualitative attributes that may be predictive of outperformance. Consistent with the Firm’s long-term value investing philosophy, identification of these traits has been central to our research and investing process since the inception of the Firm. Fundamental research is generally required to identify these characteristics. This is a time-intensive process, which contrasts with the quantitative screens that can be used to identify groups of stocks with similar price to earnings ratios or sector classifications. However, the long-term performance of companies described by these predictive attributes suggests that the effort is worthwhile. Recent commentaries have highlighted owner-operators, dormant assets, spin-offs, bits & pieces, and scalability. This month’s discussion will center around long product lifecycles.
Companies with short product lifecycles face a constant challenge: they must develop new products or reinvent themselves regularly or risk losing market share or profitability. Consider computer hardware manufacturers or video game developers, for example. As new technologies or games come to market, prior versions quickly become obsolete, or at least fall in popularity. Therefore, continuous investments in research, product development, and marketing are required just to stay in place, much less to increase market share or profitability. Witness the experience of BlackBerry (formerly Research in Motion Ltd.). In a matter of years, the BlackBerry corporate arc descended from dominance of the smartphone for business use to a brand struggling to maintain market relevance, as Apple Inc.’s iPhone and smartphones powered by Google Inc.’s Android platform have overtaken the BlackBerry’s share of the retail and business segments. This short-lived market dominance is not atypical of technology companies; accordingly, Horizon Kinetics tends to avoid long exposures to such stocks. Though there are periods when this aversion results in underperformance relative to the broader markets, often over an extended time horizon (as, rather dramatically for us, during the 1999 to mid-2000 technology bubble period), our experience has been that companies based on long lifecycle products are more appealing. While these businesses may still have variable revenues and earnings, as all businesses do, the greater likelihood that their products will still be in demand tomorrow contributes to more predictable long-term results.