As the bubble expanded and Templeton’s funds underperformed their peers, Nairn kept the faith. As it turns out, he was also gathering material for his book, Engines that Move Markets: Technology Investing from Railroads to the Internet and Beyond.
Examining the history of technology investing from the advent of railroads and electricity in the 19th century to the PCs and dot-coms of today, Nairn concludes that while technology changes, speculative fever remains a constant. “At some point in every episode,” writes Nairn, now chief investment officer of Scottish Widows Investment Partnership, “a combination of general optimism and easy money contributed to the buildup of a market bubble, based on what proved to be absurdly optimistic forecasts of the money to be made by investors from embracing the new technology.”
That’s not an original observation, of course. But in a sprightly, well-researched narrative, Nairn makes a persuasive case that there is virtually no way to reliably predict which companies will translate technological innovations into shareholder profits. “Merely avoiding the shares of long-run losers from new technology is a more reliable way of achieving excess returns from an investment portfolio than trying to spot winners, which is a high-reward, low-probability exercise,” he writes.
A penchant for overoptimism defines the “pathology of technology investing,” Nairn concludes. He identifies a cycle that begins with derision over the prospects for new technologies and evolves into hype. Companies start life starved for capital and are finally brought low when a glut of it leads to overinvestment.
Examples of stupidity run rampant through the pages of this book. In 1876, when a desperate Alexander Graham Bell offered his telephone patents to Western Union Corp. for $100,000, even then a modest sum, the Western Union boss, William Orton, inquired, “What use could this company make of an electrical toy?” At the time, Western Union, enjoying massive market share in the telegraph business, was one of the most powerful companies in the U.S. Bell’s telephone, of course, eventually pushed it into near-oblivion.
It isn’t just gullible investors who get technology wrong, Nairn writes. The experts do, too. In August 1990, when Cisco Systems went public, the husband and wife team of Sandy Lerner and Len Bosack, co-founders of the company, sold their two-thirds stake for $170 million. Even at current depressed prices they left more than $65 billion on the table.
Still, it’s almost always better to be an insider, Nairn discovers. Wily robber baron Cornelius Vanderbilt walked away with the equivalent of $450 million in today’s dollars after the recapitalization of New York Central Railroad in 1869, while shareholders were left almost penniless. By the 1870s 40 percent of all U.S. railroad bonds were in default following an investment binge that saw far more track laid than was required. There’s an eerie echo for investors in the telecommunications companies that spent tens of billions laying broadband fiber-optic cables for high-speed Internet access.
When new technologies win mass acceptance and the easy money starts to flow, crooks are usually not far behind. In the 17-year period following 1877 when Bell’s telephone was supposedly protected by patent, more than 1,700 rival phone companies set up shop. Most of them had no ambition other than to steal Bell’s intellectual property rights.
One especially crass example: Pan-Electric Co. Established in the mid-1880s and capitalized at $5 million (about $400 million today) the company’s sole assets were later shown to be paper drawings of a telephone traced from Bell’s patents. American Bell Telephone Co. spent vast amounts of time and money in court, first defending its patents and then fighting off antitrust suits.
Nairn doesn’t let his colleagues off scot-free, either. He particularly chides investment firms that launched technology mutual funds overstuffed with IPOs as the Nasdaq raced toward 5,000. “These funds [performance records] were almost entirely due to IPO activity and a narrow investment base, which was then marketed on very different grounds that did not reveal either the size of the fund when the returns were achieved or how they were actually achieved.”
Engines that Move Markets would probably be a better book if it were 100 pages shorter. But it offers an invaluable trove of investing history, much of which resonates today. As Nairn quotes Danish philosopher Søren Kierkegaard, “Life is lived forward but understood backwards.” The only question this book leaves a reader is this: Where was Nairn in 1995?
