Age of Innovation, Depression, and Opportunity

It’s tough to imagine economic sentiment getting any worse.

U.K. Prime Minister Gordon Brown, said:

“We should agree as a world on a monetary and fiscal stimulus that will take the world out of r… depression.”

GE’s CEO alluded to a potential depression when he said:

“Once you break through ’74-’75, you don’t stop ’til you get to 1929.”

Bill Gross, the Bond King, said:

“The U.S. may slump into a ‘mini depression’ unless policy makers spend trillions of dollars to spur growth.”

I guess a “recession” isn’t even much of a hope anymore. Come to think of it, I haven’t heard “soft landing” in months.

Anyway you look at it, there’s certainly some more pain ahead. More layoffs, more bankruptcies, etc. And we’ll surely have more doom and gloom proclamations.

At the risk of being one overly-optimistic though, I can’t help but see opportunity despite it all.

Just take a look at the latest consumer mania. The backers of this “dumb” idea saw opportunity to the tune of eight figures. And if anything at all, this “dumb” idea proves there is opportunity. And if we pay close attention, we can figure out how to find our own opportunities.

A Full-Blown Mania

Have you spotted a commercial for the Snuggie. I don’t own a TV and even I know what it is.

It’s a blanket – with sleeves. It allows you to read, change the channel on the television, and dozens of other activities which were “impossible” with a regular blanket.

Of course, it’s really just a blanket with two holes in it. It’s not even a new idea. The Freedom Blanket and the Slanket were pretty much the same thing (I’m sure a lawsuit is just around the corner).

Pretty dumb, right? I thought so too when I first heard of it.

Jump ahead a few weeks and this dumb idea is a smashing success. Four million Snuggies have been sold. That’s right – 4,000,000 of them! At $20 for a buy one, get one free deal. The Snuggie has been such a runaway success there are pro-Snuggie and anti-Snuggie pages on Facebook.

It’s pretty ridiculous. I’m sure Snuggie-branded slippers, pillows, book lights, etc. are on their way soon (strike while the iron’s hot, ya know). Regardless of whether you’re in the pro or anti-Snuggie camps, it proves there is opportunity in this downturn. And if we pay close attention, we can take the Snuggie example and use its secret to success in our investment strategy.

Growing a Business

I can tell you from running a couple businesses, there are basically two ways to grow. Either you take market share from competitors or you create a new market.

In the case of the Snuggie a new market was created. It’s not a better blanket with sleeves it’s the best marketed blanket with sleeves. A whole new market was practically created. Imitators have already started to pop up.

New markets aren’t usually created as quickly as the blanket with sleeves market though. The portable mp3 market has been coming together for about a decade. Mobile phones were around for years (remember the giant Motorola bag phones?) before they were small enough, light enough, and cheap enough to attract millions of users.

Quite frankly, this is not the optimal time to grow new markets. It’s expensive and risky. This is the time to take market share away from competitors.

That’s why I focus on companies which are turning this downturn into opportunity. As we discussed the other day in Turn Downturn into Opportunity Like a Billionaire, the companies which grow market share now will be perfectly positioned when the economy does recover. They’ll be the big winners. And if you can spot them early, wait for good opportunities to buy in, and are able to wait out the storm, the rewards will be immense. A few have already started moving forward.

Stay Ahead of the Shift

Earlier this week, the market was once again taken by surprise. Visa (NYSE:V) released its results from the last quarter. Visa’s earnings climbed 35% in the final quarter of 2008. Not bad considering the U.S. GDP is declining at a rate of about 1% per quarter.

Of course, expectations for Visa’s results were pretty low. Plenty of investors must have thought: How could that be? Visa doing well? I thought consumers were spending less?

It makes sense on the surface. Declines in spending will surely have an impact on companies which make money off spending. But here’s the thing, “paying with plastic” is still growing. In year-over-year terms, Visa reported growth in payment volume (12%), total cards issued (10%), and total transactions (14%). That kind of growth easily offset a small decline in total spending around the world.

The Wall Street Journal sums it up as, “The rise in the number of transactions, even as spending falls, was due to the continued transition to debit cards instead of cash. Meanwhile, consumers in distress are using plastic to manage their cash flow.”

It’s all about market share. And the likes of Visa and MasterCard are winning market share. Their top competitor is cash. And as consumers use less cash and use more plastic (not necessarily credit, Visa and MasterCard aren’t lenders, they’re payment processors) they’ll continue to grow. In a downturn like this, they’ll still grow, just not as fast.

Visa is just one example of success here. Amazon (NASDAQ:AMZN) proved its ability to grow by providing an online alternative for shoppers and deep discounts, it can grow in the face of the worst retail market in decades. There’s dozens more. The big question is, when to buy?

Innovate or Die

What makes a company a survivor? The answer is innovation. It’s the lifeblood of a business. And it’s even more important during tough times.

Take a look at GE and Woolworth’s. GE is still going strong after more than a century in business. It has successfully innovated from light bulbs to appliances to locomotives to nuclear reactors. It has had a rough go of it during the financial crisis due to problems at its financial division, but it will survive.

Woolworth’s is a completely different story. It failed to innovate. It couldn’t keep up with an innovator like Wal-Mart (NYSE:WMT). Woolworth’s was a Dow component up until about 12 years ago. Now it’s just a shell of its former self.

When it comes to innovation, there aren’t many companies better than Proctor & Gamble (NYSE:PG). It launched the first heavy duty laundry detergent (Tide), the first disposable diaper (Pampers), and the first ant-dandruff shampoo (Head & Shoulders), among dozens of other “firsts.” That’s how it has stayed ahead of the pack for 171 years.

A.G Lafley, CEO of Proctor & Gamble, writes in his most recent letter to shareholders:

We also involve external innovation partners to turbo-charge P&G’s internal innovative capability — an approach we call “Connect and Develop.” Six years ago, only 15% of our product initiatives included innovation from outside P&G. Today, more than half of all P&G innovation includes an external partner. In just the past year, we evaluated more than 5,000 innovation opportunities from small entrepreneurs, universities, research institutes, and large companies. This is a fourfold increase over the number of external innovations we were considering at the beginning of the decade.

As you can see, staying ahead takes a lot of work. And, quite frankly, it takes a lot of work to uncover the early innovators. But if you want to uncover the stocks you can hold forever and deliver 10%, 20%, and 30% per year, like the Wal-Marts and Procter & Gamble’s of the world, there’s never been a better time to start hunting.

Right now, it seems like everyone in the world is calling for a depression – the worst possible scenario. A few others (like us) will take this time to find the true opportunities and figure out who the innovators are now. That’s the best thing to do in a bear market and we’ll be well rewarded, whether we’re in for a long recession or a depression.

P.S. There is one more thing. In the last Prosperity Dispatch we took a look at oil and where billionaire investor Richard Rainwater was putting his money. We also looked at his investment in Thornburg Mortgage (THMR).

So I’d like to clarify that Thornburg is not bankrupt. It’s certainly facing some tough times, but it has not gone under. The fact that Thornburg has been able to keep its doors open got me thinking about the banking industry.

It’s no secret the financial industry offers some of the biggest rewards. There just aren’t too many jobs where you can start with a 6-figure salary right out of college and turn seven figures in a few years. As a result, banking has attracted a lot of exceptional people.

Sure, they’re all getting blamed for everything now. Don’t get me wrong, a lot of them have taken some big bets which have resulted in big mistakes. But there will be winners – eventually.

We’ve already looked at how Bank of America (NYSE:BAC) will probably benefit greatly from the current debacle. What about the smaller financial companies though? What will be the rewards for them if they can survive? Was David Dreman really onto something the other day when he was talking to us about the values he’s finding in financials? Is this the time to buy – if not, when?

My biggest investment wins have come from thinking of “crazy” ideas like this. I bought my first oil stocks in 1999 and loaded up on water during the tech crash. We’ll investigate next week after the Treasury changes the rules one more time.

By Andrew Mickey

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1 Comment on Age of Innovation, Depression, and Opportunity

  1. I think this is a very interesting study. Is depression here or not? not very clear. But if you look at the past history recessions and depressions come and go. Economies go through cycles and recession is part of the cycle. I read the history of cycles at http://www.recessioninfocenter.com

    so if you tighten up during recession it makes sense

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