It's time to say farewell to buy-and-hold. The strategy involves buying high-quality stocks at a reasonable price and holding them for a long time, if not forever. It has made many smart investors, including Warren Buffett, a lot of money. But technology is the buy-and-hold investor's enemy, and it is becoming a stronger and more disruptive force every day.
Take the oil business. It's been a pretty reliable investment for more than a century. When oil prices began a grand climb in the 1990s, Canada's oil sands became a very profitable play. Suncor's share price, for example, hit an all-time high of more than $70 about five years ago. Recently, it's dipped to less than half that, despite the company's merger with Petro-Canada in 2009.
What happened? World oil prices plunged in 2008 and they are still about a third below their historical peak. More importantly, however, oil differentials—the difference between global benchmark prices and local ones, such as the prices for bitumen and heavy oil from Western Canada—have widened. Suncor is a major oil sands producer, and that has lowered the profit per barrel that it earns.
Of course, oil prices tend to fluctuate with the economy, and much of the developed world has struggled for five years. But it's now no longer just a question of economics; it's one of technology. New drilling techniques have made billions of barrels of shale oil in the United States economical to extract, and the market is being flooded with the stuff.
Because shale oil is lighter and easier to refine than what Suncor sells, it usually fetches a premium. Even five years ago, few analysts predicted this. Investors who bought Suncor as a quality, buy-and-hold name, with decades of proven reserves in a safe location and valuable refining assets, are hurting. The stock has basically returned nothing since the beginning of 2006.
Financial services are also being rocked by technology. Look at Western Union, a 162-year-old company best known in recent years for long-distance wire transfers of money. That was—and still is—a very profitable business, and Western Union is an iconic global brand. But the company is under intense pressure from web-based competitors that are stealing market share.
Can Western Union compete? Yes, it can launch its own low-cost services and buy up successful upstarts, but its profitability is permanently cramped as a result. You could have made a strong argument for buying and holding Western Union even in 2006, when it resumed trading as a public company. You would have been wrong.
The same goes for Eastman Kodak. It was added to the Dow Jones Industrial Average in 1930. In the 1970s, it had 90% of the U.S. market for film. It also sold lots of cameras, and developed a digital camera in the 1970s. The company was still very profitable in the 1990s, despite strong competition from Fuji. Yet even though Eastman Kodak tried to make the shift to digital photography and imaging, it filed for bankruptcy protection last year.
Or how about toys? Kids still want dolls and building blocks, but they also want iPods and tablets. And they're getting them. Inevitably, some of the spending going to Google, Samsung and Apple is money that would probably have gone to Mattel and Hasbro. Those toy company stocks are still doing fine, but technology will certainly erode their profits. Apple won't kill Barbie, but it will—and already has—lowered her popularity.
The effects of technological change are now spreading far beyond the tech sector. This is not to say there are no companies left that will last a long, long time. It's hard to see how Coca-Cola could be digitally replaced. But classic buy-and-hold candidates are becoming scarcer. Taking profits on them is looking like a better and better option by the day.
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VALUE
Genworth Financial Inc.
Price/book value ratio: 0.27
Genworth insures home mortgages in the United States. Understandably, the last few years have been rough, but the U.S. housing sector is limping back to health. The stock trades at about a 75% discount to its book value per share. Ergo, it could easily quadruple if the company's balance sheet is sound. That may be why U.S. deep-value investor Seth Klarman owns a sizable stake.
GROWTH
Network Media Group Inc.
Recent market capitalization: $1.8-million
If content is king in the digital age, tiny Vancouver-based Network Media has some impressive credentials. CEO Derik A. Murray has produced such properties as Legends of Hockey and the 2009 documentary Facing Ali. He's also signed agreements with Kiss's Gene Simmons and basketball great Steve Nash to develop series. Not just TV networks buy series these days—Netflix, YouTube, Hulu and Amazon are also getting into the game. At about 10 cents a share recently, Network Media certainly has room to grow.