When it comes to investing, especially in technology stocks, people engage in heated debates. The worthwhile debates are about potential growth rates, gross margins, competition and other factors that influence a stock's valuation. The far less useful debates centre around the opinions that potential investors have formed about a product.
Opinions, even when backed up by science or other sound logic, are no match for the simple power of observation. I often hear people say things like, "I don't know why anyone would buy this product" and reject a stock on that basis.
In most cases, an investor is far further ahead by looking at whether people are actually buying a product. Every good marketer knows that people buy things based on emotion and later justify their decision with logic.
As an investor, you'll do better if you spend less time worrying about consumer logic and instead observe what consumers actually do.
Consider BlackBerry Ltd. It remains a Canadian icon, and is credited with inventing the smartphone market. There are plenty of industry pundits who claim its product is superior to a competing iPhone or Android model. These people point to better security, a better typing experience and better battery life.
Yet if we forget about these arguments and just pay attention to what consumers are actually doing, we see a very different picture. Those claiming BlackBerry is better may be right, but it doesn't matter. That's why Apple Inc. and Google Inc. are part of my Strategy Lab portfolio, and I'm not ready to include BlackBerry yet.
Netflix Inc. has a bunch of content that customers can stream to their computers, mobile devices or TVs. If you listen to those who criticize the service, you'll be bombarded with reasons not to subscribe. The movies are all old. They don't have recent episodes of most TV shows. Video quality isn't as good as true HD.
None of this matters. As an investor I'm far more interested in how the population behaves. Who's right and who's wrong about the quality of Netflix's product is irrelevant. What matters is that 1.24 million new people joined Netflix's streaming service last quarter, and management expects two million new subscribers this quarter.
Organic food is another topic people love to debate. If you shop at Whole Foods Market Inc., you might have friends who make fun of you for spending your money at "Whole Paycheque."
I'm the first to admit that in many cases organic food is probably no better for you than the regular stuff. Organic junk food is still junk food, after all. But none of this matters.
What does matter is the growing consumer interest in eating healthy, and the public perception that organic equals healthy. The result: Whole Foods just reported another solid quarter with 12-per-cent, year-over-year growth and 20-per-cent growth in earnings per share.
I recently wrote about Monsanto Co. That article drew far more hate mail than anything I've published as part of Strategy Lab. In nearly every case, readers misunderstood me, thinking I was making a scientific argument rather than presenting my observations on consumer behaviour.
Ten years ago, Monsanto was a wonderful investment because adoption of genetically modified (GM) seeds was on the rise, and the potential danger from critics of the technology was low. Observation would have shown you that this stock was a growth machine.
Today I feel the risks to investors have increased because of consumers' growing awareness of GM foods, and an increasing perception of the health risk around them. What matters is how consumers behave, and how this may change the behaviour of giant food companies in selecting ingredients. This, in turn, may harm Monsanto's growth rate regardless of whether or not those against GM foods are scientifically correct or incorrect. Behaviour trumps science.
Tesla Motors Inc. is a fairly new car manufacturer on the global scene. It makes electric cars and must compete against GM, Ford, and other giants in the business.
If you listen to critics of Tesla, you'll hear all sorts of possibly valid arguments. The batteries won't last. The cars are too expensive. People won't buy them because of range anxiety.
But the actions of consumers tell a very different story. According to the Electric Drive Transportation Association, U.S. sales of electric-only cars rose 430 per cent in June from a year earlier. Tesla chief executive officer Elon Musk recently told Bloomberg that Tesla is now making significantly more than 400 cars a week, and this will grow to 800 a week late next year.
Regardless of any criticisms of battery chemistry, physics or economics, what matters to a Tesla investor is consumer behaviour. And there is no debate about that. Electric car sales are skyrocketing.
As an investor, you should realize that people act on emotion. Observe what people actually do rather than analyzing what they should do. It will make you a better stock picker.