By Jack N., Communications Analyst and Blog Contributor
About 30 years ago, I bought a Commodore 64 computer, and my life changed forever - and I mean that in a good way. Snicker if you will, but about 17 million other people did the same thing around the same time.
Fortunately, I was not an investor in the company, just an owner of this amazing little piece of personal computing innovation. After a few years of great prosperity for the company and shareholders, Commodore lost the innovation lead, along with market share, revenue and profit, to other PC makers. In 1995, the moribund pieces of Commodore – arguably the biggest name in personal computers in the early 1980s – were liquidated.
So here we are with today’s introduction of Microsoft‘s Windows® 8, and traders and investors might be wondering what it could mean for them.
Academic research suggests that the success or failure of any innovation depends on one basic rule: Will it make a pile of money for a decent period of time? Traders and investors who invest in innovation have to decide whether they want to buy (or sell) before that answer is ever known.
There are some interesting insights in some research.
- A study released two years ago at a European conference on innovation, “Innovation and Stock Price Volatility,” concluded that companies that constantly innovate will see unusually high stock price volatility. The study used company patents and spending on research and development to define fast-paced innovation.
- In his 2000 book “Irrational Exuberance,” Yale economist Robert Shiller famously predicted the stock market fall of the early 2000s. Shiller wrote that investors overreact to technological innovation, creating stock price bubbles that eventually burst. He cited high-speed rail in the early 1900s, mass production of automobiles in the 1920s, and the widespread availability of the Internet in the 1990s.
- In a 2008 paper explaining the bubbles, two University of Chicago researchers, said that stock price rises when a company first announces the good news of a technological innovation. But the price falls as the technology becomes more widely adopted among competitors. Assuming, of course, the innovation is good enough to be widely adopted.
The research pretty much tells you what you would expect – and what investors and traders need to consider: A company that successfully innovates may see its stock price rise and continue to rise until other companies start adopting the same or similar innovation.
This explains why companies known for innovation continue to innovate. They want to continue offering new and better services, staying one step ahead of competitors. So Apple Inc. (AAPL) keeps making newer gadgets with different features; Microsoft Corp. (MSFT) continuously upgrades its Windows® operating system; and Monsanto Co. (MON) keeps pumping out seeds that are resistant to more and more crop predators.
If you’re investing in business innovation, be prepared for stock volatility. That might be a good thing if you’re a trader looking for big, rapid price swings. And just know that innovation isn’t something that only tech companies do. Every sector has innovation. You just have to look for it.
In Scottrade’s 2012 American Investor Survey, many investors expect technology , energy, natural gas and oil sectors to perform well over the next 12 months. Do you think these sectors offer good opportunities for innovation?
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Jack N. is a communications analyst in the public relations department at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.
Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.
The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.