It was Joseph Schumpeter, the Austrian-born American economist, who spoke of “creative destruction,” the dynamic, change-oriented and innovation-based tendency of Capitalism. The market is constantly replacing old ways of doing things with new ways. New mouse traps are constantly being devised.
All this makes for a very interesting and frustrating investment business, trying to figure out the future. Retailing is a case in point. The traditional ways of doing business are changing rapidly. E-commerce made up just 5% of total retail sales in 2012. Today this is up to 8.5%, and growing. Amazon alone is responsible for nearly half of all online retail sales so far this year. Anyone in the path of Amazon -- they call it ‘Death by Amazon’ -- is potentially very vulnerable. Whereas the Standard & Poor’s 500 is up by double digits the past year, the Retail index is down by double digits. Sears, Macy’s, Payless ShoeSource, Radio Shack and many, many others have closed multiple stores.
There will be winners in the traditional retail space going forward, however. Online sales are not going to take every dollar we spend. But figuring out the winners and the losers is well nigh impossible right now. Best Buy was once thought of as ‘Amazon’s Show Room.” You checked out the item in the store and then you bought online. Best Buy has since staged an impressive recovery, emphasizing what store employees can do that online can’t, but again it is far from certain that this initial recovery will continue.
Jason Zweig of The Wall Street Journal wrote in 2016 that there have been 44 U.S. stocks the past 30-years which have generated cumulative returns of 10,000%. These ‘super stocks’ are what everyone would like to find. One very interesting fact is that each of these 44 had a “near death experience”, losing 70% to 80% of their value at some point in their history. The companies had to change how they did business and when they successfully did this, a major stock price recovery ensued. There will probably be super winners in the retail space as these adjustments are made. The problem is, right now these future winners are still tinkering with their business and many look like real losers. This is what makes Value Investing so difficult.
In the meantime it is also interesting to note that “creative destruction” has a flipside. The Wall Street Journal recently reported that total job gains in e-commerce exceed job losses in traditional retail. Yes, Amazon is killing many stores and yes, Amazon is very technology focused (think automation, robots and artificial intelligence) but they still need plenty of bodies to manage the warehouses, the computers and the fulfillment centers.
The secret to investment success is trying to identify some trends of the future, choosing the companies you think will succeed within these sectors and then sticking with your investments through thick and thin. It’s not market timing that is important, it’s judgment, courage and patience.