Strategy

There is also a belief that the most successful “tech” companies are winners because they alone possess some unique, proprietary attribute, be it intellectual property, favorable contractual terms, uniquely skilled personnel or simply the advantage of being a first-mover. History provides an honor roll of examples:

• • • Microsoft with its original contract to provide operating system software to IBM, then the leader in personal computer sales;
    • Oracle with its impressively effective direct sales force, capable of “making” a quarter even when the company was “off” its product cycle;
    • Dell, with its direct-to-consumer business model, – often copied, but never duplicated by manufacturers;
    • Amazon with its early emphasis on customer service at the expense of early profits;
    • Google with its uncanny algorithm for returning relevant links on its first page of search results.

But there is no empirical evidence to support this claim. And the fact that there are only about a dozen such memorable companies leads one to reasonably conclude that these companies are exceptional, and rare, and therefore searching for their kind in the context of assembling a stock portfolio is a fool’s game. Moreover, searching for “The Next Microsoft” inevitably leads one to assemble groups of companies with a higher-than-normal mortality rate, and therefore highly likely to destroy alpha, rather than create it.

The existence of all these fallacies, to which both institutional and individual investors fall prey, highlights our assertion that the worthwhile elements of consistent alpha generation are vastly outnumbered by the worthless or ineffective elements.