Tim Berners-Lee, creator of the World Wide Web, holds court at the SXSW festival in 2013. Photo by Amy E. Price/Getty Images.
25 years ago Monday, Al Gore waved a magic wand at an IBM mainframe and said, “Let there be Internet.” And the Internet became a thing, and it was good. Kidding! A British computer scientist named Tim Berners-Lee, then with the European Organisation for Nuclear Research (CERN), uploaded the world’s very first website, introducing humanity to hyperlinks and the information super highway.[i] It still lives here, in all its beautiful, graphic-free glory. Visually simple yet technologically groundbreaking, it was a post-modern spinning jenny or moving assembly line—an invention that boosted productivity exponentially, upended entire industries, and created astronomical wealth and countless investment opportunities. Even today, its history has plenty of relevance for investors.
If you are more than 25 years old, chances are you view life as two distinct eras: pre-Internet, and Internet. The time when you did research at the library, called your family long-distance, got the morning paper every day, bought albums at Tower Records, bought books at Crown and got all your clothes at the mall or on Main Street—and the “now,” where you can do all that on the couch, using your device of choice while watching football and streaming the latest episode of Serial. But the Internet as we know it didn’t magically appear one day. It evolved from that first website, which offered few hints of what was to come. Play around with it, and you will find basic explanations of how hyperlinks work and a collection of newsgroups for anything from Doctor Who and Dungeons & Dragons to antique collecting, gardening and coats of arms. (Alas, they aren’t live anymore.) If someone told you 25 years ago that this technology would one day bring online shopping, gaming, video chatting, streaming and so much more, you probably would have called the men in white coats to come and take them away.[ii]
But all those wonders did come. And many, many more will follow as ever-more inventive people dream up new applications for this technology. This is the first lesson for investors: Those who create new technology are seldom those who profit most. CERN is a think tank. Berners-Lee and other researchers there[iii] helped pioneer the web’s architecture, but other individuals in the private sector created, launched and profited off the services we use every day. Jeff Bezos and Amazon took online shopping mainstream (and to the extreme). James Clark and Marc Andreesen made a fortune off Netscape—the first popular way to browse the web—before losing the market to Microsoft’s Internet Explorer juggernaut. The IRS created the e-file option for income tax returns, but Intuit exploited it. Mark Zuckerberg and Jack Dorsey—founder/CEOs of Facebook and Twitter—devised user-friendly platforms to indulge our inner narcissists and made a boodle in the process. CERN doesn’t get a cut of any of these firms’ revenues[iv]. The inventive users made the money—and created vast wealth for investors.
Of course, some of that wealth was temporary, because the Internet also gave us a classic financial bubble in its 10th year. The mania surrounding dot-com stocks was pretty much textbook, and to this day it’s an object lesson in both bubble-spotting and the dangers of succumbing to greed. As the 1990s closed, investor sentiment hit full-on euphoria. Magazines hyped “the new economy” that would grow forever. CNN hosted a debate on whether “boom and bust” was no longer a fact of life. Pundits sought words for economies that only boomed, in perpetuity. IPOs of lousy firms with no earnings, no history and a tendency to burn through cash at warp speed fetched huge premiums. Any firm with dot-com in its name could get easy financing, business plan optional. Investors got bored with broad-market returns—“just” 33.4% in 1997, 28.6% in 1998 and 21.0% in 1999[v]—and went all-in on Tech stocks, all chasing “the next Dell.” When the bubble popped, they got burned. During the 3/24/2000 – 10/9/2002 bear market, the S&P 500 fell -47.4%.[vi] S&P 500 Technology stocks fell -82.3%.[vii] The Internet Software & Services industry fell -86.5%.[viii] Not diversifying meant setting yourself up for financial ruin.
The Internet’s saga also shows how technological change creates winners and losers. For investors, identifying these is the key to success. The Internet brought all sorts of new businesses, but it also left a lot of destruction in its wake—“creative destruction,” in economic jargon. The casualty list is long: Blockbuster; Hollywood Video; Circuit City; The Good Guys, Loehmann’s; Tower Records; National Record Mart; Sam Goody; Borders; Crown Books, Radio Shack[ix]; Service Merchandise and many, many more retailers were killed at least in part by e-commerce.[x] The music industry and print media are still struggling to adapt. Now, with the advent of Uber, the protected taxi industry is in the internet’s crosshairs. The number of shopping malls in America has plunged since 1990. Identifying which firms are likeliest to survive a seismic shift in technology—finding those with the resilience and smarts to embrace and use technology to their advantage, rather than futilely playing defense—is key.
That last paragraph might sound like a lament, so here’s a happier takeaway: The Internet (and its offspring, mobile computing) have boosted productivity and economic output in ways we can’t even quantify. Most economic statistics are antiquated, built for the manufacturing era. Many were created in the 1930s and 1940s, when America’s service sector was just blossoming and computers seemed like science fiction. Productivity—output per unit of labor—is a classic example. Traditional productivity metrics say the Internet hasn’t really made us more efficient. But think about your own life, and chances are you’ll find that can’t possibly be true! If you’re a plugged-in American or European, chances are you are doing more with less, consuming more than ever, and not spending yourself into oblivion to do so. Or, as The Telegraph’s Jeremy Warner put it last week:
It is not just that the present Information, Communications and Technology (ICT) revolution will take time to show through in the productivity figures, it is also that as things stand, some of its effects are not recorded at all.
From entertainment to communications, many of the things that we used to pay quite a lot for have to all intents and purposes become “free”, which in turn means we consume an awful lot more of them.
These and other examples of the so-called “shared economy” are surely evidence of very substantial productivity and consumption growth, which, because they have little or no value attributed to them, don’t show up in official data.
None of this is to belittle the problems of those struggling with low wages; it is only to point out that some of life’s one-time luxuries are now available to all at marginal cost. We may not be better off in monetary terms, but we are consuming at an ever more furious rate.
Consider Christmas shopping. Before the Internet, Christmas shopping usually meant going to the mall, where you spent an hour looking for parking, risked fistfights for the last Cabbage Patch Kid or Sega Genesis and nearly got crushed to death as you joined the throngs elbowing their way from Mervyn’s to Sanger-Harris[xi]. It took hours, and you spent the next day nursing bruises and a sore back from carrying your loot around. A whole weekend lost. Now? You can do it all in an hour, from home, with no physical damage, freeing you up to do whatever else you fancy. That’s an amazing efficiency gain! But it isn’t tallied. Depending on where you shop, it might not even show up in the next GDP report. For example, this article’s author bought hand-dyed yarn from a gal in North Carolina, pottery from a small shop in Poland, picture frames from a couple in South Yorkshire, vintage t-shirts from a dude in Canada, embroidery kits from a French village and glassware from an artist on the other side of town. No official statistics will measure any of this, because Etsy.com and its ilk don’t get captured by GDP. The more technology proliferates, the bigger this blind spot becomes. Statisticians will solve it one day. They’re clever. But in the meantime, take productivity, GDP and even inflation with a grain of salt—stats are terrible at capturing technology’s impact on prices, too.
Best of all, even after 25 years, we have probably only just scratched the surface of what the Internet, cloud and mobile computing can do. The Internet is still young—now old enough to rent a car. It has a long, long life ahead of it, and the possibilities are limitless. Stocks were your best way to capitalize on this over the past quarter century (not just Tech stocks!), and they probably will be as the future unfolds. Don’t let all that gloom about secular stagnation fool you. The business cycle will always be with us, but so will long-term opportunities for investors and risk-takers.
[i] And, fun fact, he designed it on a NeXT cube.
[iii] None of whom were named Al Gore.
[iv] We were sort of tempted to run with a bad Field of Dreams analogy here—“If you build it, they will come.”—but the film’s ending strongly implies Kevin Costner’s character eventually made a fortune from selling tickets to pick-up games featuring Shoeless Joe and co.
[v] FactSet, as of 12/21/2015. S&P 500 total return for 1997, 1998 and 1999.
[vi] FactSet, as of 12/21/2015. S&P 500 total return index, 3/24/2000 – 10/9/2002.
[vii] FactSet, as of 12/21/2015. S&P 500 Technology total return index, 3/24/2000 – 10/9/2002.
[viii] FactSet, as of 12/21/2015. S&P 500 Internet Software & Services total return index, 3/24/2000 – 10/9/2002.
[ix] They are still sort of trying to hang on. If you’ve seen The Princess Bride, they are “mostly dead.”
[x] Sears is still alive, but its catalog isn’t.
[xi] Or Bullock’s, Emporium-Capwell, Foley’s, Filene’s, Robinson’s May, I. Magnin, Marshall Field’s, Liberty House, Gimbels or any other defunct and sorely missed department store.