Some of the world's greatest fortunes were built on the back of technology. Legions of millionaires, and the occasional billionaire, owe their all to Oracle, Apple, Intel, Google, or Microsoft. Yet you should no more judge success in tech investing by Microsoft than you'd use Mick Jagger as the gauge of a successful career as a rock musician. Microsoft is a survivor—indeed a major winner of the technology wars—as are Apple, Intel, Oracle, Google, and so it seems, Facebook. To fairly judge technology as a whole you'd have to give equal consideration to Kaypro, Wang Laboratories, Fairchild Semiconductor, Digital Equipment Corp., AltaVista, and all the other mighty fallen.
Or you could delve into the statistics, as we do in this month's The Data. It turns out that US $100 spread among the 118 tech stocks listed by Standard & Poor's in 2002 would now be worth $138, a return that barely edges out inflation. If that money had gone instead into S&P's first 118 nontech stocks as listed in alphabetical order, you'd have a 25 percent better return. And remember, this eight-year period comes after the bursting of the dot-com bubble, so it measures the tech sector not from a prior high but from a prior low. It therefore ought to show technology to its best advantage.
Why do tech stocks stink? Technology is, after all, one of the things that separates developed countries from less developed ones. And technology cultures and establishments that are robust, creative, and highly advanced are what distinguish the highly productive economies—those of the United States, Japan, Germany, and China. In a world of uncertainty and disappointment, semiconductor performance, with its regular doubling, is the one thing that can be counted on to improve without fail.
However, as any economist will tell you with gimlet-eyed glee, the market value of a thing reflects not its intrinsic worth but relative scarcity. Just because you're in a business that provides goods that double in performance every 18 months doesn't mean that their price will rise, that your profit margin will hold steady, and that your job won't disappear. Just because your invention has sparked a revolution—the kind that produces qualitative changes in the way people live—doesn't mean that it will make you a nickel.
Did the world owe a living to the inventor of the graphical user interface (and I don't mean Steve Wozniak)? To the company that first commercialized computers (and I don't mean IBM)? How about the inventor of the telephone (and I don't mean Alexander Graham Bell)? To those of you keeping tally, the people and organizations I am referring to are Xerox PARC, the Eckert-Mauchly Computer Corp., and for the possible inventors of the telephone, well, there's Johann Philipp Reis, Antonio Meucci, Elisha Gray—indeed, a very long list of names.
Fifteen years ago, in a previous life as a business reporter, I cowrote a story predicting that search engines would be among the first to make big money on the newborn Web. My coauthor and I reported on every search engine we could find. Although it was clear that most of them would go to the wall, it seemed equally clear that at least one—I favored AltaVista—would rule the Web. Wrong. Two months after the article came out, Larry Page and Sergey Brin began working on Google—and that's the company that ended up ruling the Web. For now, anyway.
The moral is that the winners write the history books. Or, to be precise, we humans are prone to an error in thinking known as survivorship bias—the tendency to take the readily available evidence of the past as a fair mirror of that past.
Survivorship bias lives on, fooling generations of investors. In a landmark study years ago, economists found that more than half of all mutual funds had beaten the market—a seemingly impossible feat, given that such funds make up such a huge share of the market. The reason is that a fund generally can make it into the record books only after it's been around for a while, and the only funds that last long enough are those that do well from the get-go—likely through sheer luck. The losers' results aren't fully counted. Other economists have speculated that stocks are not quite so good an investment over the long haul as they're cracked up to be, given that all the really long-term data come from the New York and London exchanges, which were lucky enough to be based in the two best-performing countries of the past two centuries.
In a world seen through the forgiving lens of survivorship bias, most mutual funds and tech stocks may be above average. But in the real world, past performance is no guarantee of future results.
This article originally appeared in print as "The Winners Write the History Books."