While explaining his investment philosophy during an interview, Warren Buffett famously remarked, “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
Recognizing businesses that are wonderful, however, is no easy task. Perhaps the best strategy is to find a business at the center of a long-term economic trend. For example, some look to the aging American baby boomer generation and seek investment opportunities in assisted living facilities. Some look to a growing world population, dietary shifts triggered by increased incomes in developing countries and growing demand for biofuels as signals of imminent expansion in the agriculture industry. And some cite government fiscal irresponsibility and falling energy costs as rationale for overperformance in gold-mining stocks. In each of these cases, investors argue that outside factors are so strong that even poorly run businesses in these industries will do well since they stand to gain from enormous industry tailwind.
Some of the most profitable secular trends often can be found in the technology industry. Those that recognized the potential of the mainframe computer in the 1970s witnessed phenomenal returns in names like IBM, Sperry Rand, UNIVAC and NCR. Those who understood the high prospects of personal computing in the 1980s and early 1990s compounded their return with companies like Microsoft, Compaq, Dell and Intel. Those that spotted the growing importance of Web 2.0 at the turn of the century made money with names like Google, Amazon and Baidu.nI believe the next secular trend in the technology industry is the widespread adoption of new mobile device technology. Mobile technology has seen a remarkable evolution during the past 10 years, starting with just basic voice capabilities. Today, data-enabled mobile devices can be used for everything from social networks, video streaming, multiplayer games, music downloads, high speed data connectivity and video calling.
While Americans have grown used to these new features in the last year or two, the developing world is just starting to catch on. Past technologies, such as the Internet and telephone lines, were constrained in developing countries because of a lack of infrastructure. A recent study by the International Telecommunication Union found that mobile telephone subscriptions have decoupled from past infrastructure-constrained technologies such as the Internet and fixed telephone lines. Indeed, the study reports that 25.9 percent of the world has access to the Internet whereas 67 percent of the world has a subscription to a mobile cellular telephone. The most rapid growth in mobile subscriptions is occurring in the developing world, especially in China and India. Each is witnessing three-digit growth in 3G mobile devices. To put it in perspective, in 2005 there were 200 million subscribers to 3G networks and 160 network operators. Only four years later, in 2009, those figures have grown to 885 million subscribers and 590 network operators.
The fastest growing segment of the mobile device market is undoubtedly smartphones. Only about 12 percent of all new cell phones sold are smartphones, but that percentage is rapidly rising. A number of factors are now simultaneously converging to spark the widespread adoption of smartphones. First is the emergence of radical new phones. The release of Apple’s iPhone in June 2007 and Google’s recent release of the Nexus One serve as game-changing devices that offer a new kind of user experience. They are surprisingly similar to the release of DOS in 1981, which allowed third-party software for the first time ever, and the release of Netscape Navigator in 1994, which changed the way computers interacted with the Internet.nSecond is the expansion of text messaging and mobile e-mail services overseas. Any college student can vouch for the value of texting. In countries with unreliable Internet access, mobile e-mail and texting have become even more valuable.
The third factor in the widespread adoption of smartphones is the development of third-party “apps” for smartphones. These apps allow users to do everything from checking the news to counting calories.
Another major factor is the convergence of several technologies onto one mobile device. Smartphones are not only phones, but also can serve as mp3 players, GPS trackers, cameras or handheld game consoles.
Finally, the development of faster mobile networks is allowing users to surf the Web at broadband speeds on their smartphones. The falling prices of smartphones and data plans put these services at a sweet spot for consumers in terms of affordability and service. Each of these factors converging during the next few years signals that the smartphone industry, and more generally the mobile device industry, is at an inflection point.
Inventors with the stomach to put savings into the mobile device industry may be handsomely rewarded over the next decade as the industry grows by leaps and bounds. The obvious choices include Apple and Research in Motion, maker of the BlackBerry. Less widely known names include Qualcomm, which is responsible for mobile device research; Syniverse Holdings, the worldwide voice and data network provider; and American Movil, a wireless communications provider in Latin America.
As with many companies in this sector, the odds are stacked in your favor as the industry is primed for explosive growth. I wouldn’t be surprised if the IBM, Microsoft, or Google of the next decade is heavily involved in the mobile device market.
Rahul’s column runs biweekly Thursdays. He can be reached at r.gorawara@cavalierdaily.com.
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