Successful businesses detect change.
They don’t always have to act on it (although they may be foolish if they don’t).
The same goes for successful investors. If you can spot a change (or even a potential change) early on, it can lead you to a big pay day.
But if you spot the change and don’t act on it… well, the results aren’t as good.
Take Eastman Kodak [NYSE: EK] as an example. The company had a great new idea in 1975… it invented the world’s first digital camera.
That’s some foresight.
Today, digital cameras are a central part of new media and the social networking fad. Photos on Facebook. Twitpics. Photos taken and published seconds or minutes after both trivial and important events.
Who doesn’t have at least one device with a digital camera? So, for the digital camera inventor it should have been the path to fortune for them and their business. But based on the news we’ve seen overnight, that hasn’t quite happened…
Yesterday, Eastman Kodak went into chapter 11 bankruptcy protection. It means the company will have the chance to reform the business rather than go bankrupt. But, a once household name is on the verge of death.
Where did it go wrong?
Well, this is where it gets interesting. After the invention of the digital camera, Eastman Kodak either made its biggest mistake… or one of its best ever decisions.
Bloomberg News writes, “The company also invented the first digital camera in 1975, which it shelved because it would threaten its lucrative film business…”
The first reaction is to say, “How dumb were they?”
But maybe shelving digital photography 37 years ago was the best choice the firm ever made. After all, if they had gone ahead with it, who can say Kodak wouldn’t have gone bust earlier… By other firms beating them out that had a better handle on the technology.
After all, as you can see on the chart below, the Eastman Kodak share price didn’t do so badly after it shelved the idea:
Click here to enlarge
Of course, we can never know for sure what would have happened.
But it’s an insight into why some ideas stay hidden… while others are just delayed.
That’s typical of what happens in big companies. For them it’s not just whether a new idea is profitable. It’s about whether the new idea will harm or destroy the company’s existing business.
In 1975, the managers of Eastman Kodak weighed up the options. They decided the risk of introducing a digital camera to the market was too great. In the short term they may have been right. But in the long term they were hopelessly wrong.
Because all it did was delay the technology. It didn’t kill it. Soon, others picked up on digital camera technology. They saw the opportunity and what it could be worth.
The will to detect and accept change is why those businesses succeeded… while Kodak failed.
Detecting and accepting change is one of the things we look for in small companies. When you think about it, it’s hard for a small company to just copy a big company. Small companies have to do things differently.
That’s where entrepreneurs either create a new product to replace an existing one… or they’ll try to nudge an existing product in a new direction.
That’s what makes small firms more interesting than big firms. If a big firm does something new it may only have a small impact on the firm. But if a small firm does something new, it can be a game-changer.
The lesson you (and Aussie companies) can learn from Kodak’s demise is investing and hoping a company isn’t overtaken by new technology is a sure-fire way to lose a lot of money.
And while investing in small firms with new ideas is risky, if the game-changing idea comes off, that’s when you get the big pay day. Simply because you only need to make a small bet to potentially make a big return.
If the bet doesn’t go your way, what have you lost? You only placed a small bet anyway.
Right now, the Australian Securities Exchange is full of good businesses with great ideas: biotech companies developing new drugs, oil and gas companies using new methods to recover hard-to-reach resources, and hi-tech firms looking for the next direction for the technology industry.
But more than that, after a year of taking a beating, many of these stocks trade for just cents on the dollar.
Our job over the coming weeks and months is to figure out which of these good businesses with great ideas has the best chance of success.
It’ll be hard work, but it’ll be a lot of fun too.