Good apples are not always good investments

He is no longer with us, and the world is poorer for it.

A restless college dropout, he founded a wildly successful company whose innovative products touched millions of lives. He was a brilliant, dictatorial and cantankerous leader, relentlessly pushing his staff to solve one impossible problem after another. He had no use for conventional market research, and trusted his own vision to create products with little detectable demand that flew off the shelves upon introduction.

He zealously guarded his personal privacy but revelled in his role as a master magician on stage when introducing his firm’s latest innovations to eager crowds of industry followers. Stockholders wore big smiles as the shares vaulted to one new high after another.

In many ways, he was the antithesis of the conventional corporate chieftain, and despite his demanding persona, he was revered by employees, customers, and even competitors to a greater extent than almost any other chief executive in recent memory.

A tribute to the late Steve Jobs?  No, to Edwin Land of Polaroid.

The son of a scrap metal dealer, Land dropped out of Harvard to pursue his own research at the New York Public Library on polarized light filters. He founded Land-Wheelwright Laboratories in 1934 with his former physics professor, and his low-cost polarizing filters proved useful in products ranging from sunglasses to army tank telescopes and gun sights.

After the war, he turned his attention to photography and introduced the Polaroid-Land instant camera in 1948. Despite a stiff price tag of US$89.75 in the day, the first shipment of 57 cameras sold out in a matter of hours at a Boston department store, and the firm never looked back.
Numerous improvements followed, and sales boomed as the cameras and film became smaller, lighter, easier to use, and less expensive. The stock price did likewise, and Polaroid became a bellwether “glamour” stock during the post-war bull market, soaring tenfold in just five years from 1963 to 1967.
When a cover story in Time appeared in June 1972, Polaroid seemed all but unstoppable. Land’s inventive genius had resulted in an astonishing new industry with technology protected by a wall of over 1,000 patents. (Land himself held 535 patents, second only to Thomas Edison.)

Polaroid shares reached an all-time high of US$149.50 in mid-1972, amid intense excitement over the ingenious new SX-70 single lens reflex colour camera and rumours of an instant movie product.
Government surveys at the time identified photography as one of the fastest-growing industries in the country, and Polaroid appeared to be a key beneficiary: In the premium category (cameras selling for $50 or more), Polaroid was not only the undisputed leader but outsold all other global competitors combined.

Land was one of Steve Jobs’ heroes, and the youthful computer tinkerer from California felt almost a mystical connection with the Cambridge scientist 46 years his senior. Both were impatient perfectionists, often driving themselves even harder than their overworked employees. Land was infamous for wearing out staff members, who rotated in shifts while he focused on knotty problems. During one marathon research session, Land wore the same clothes for 18 straight days. When Jobs had the opportunity to meet Land personally, he found that he and Land shared a peculiar characteristic: Both believed that new products were not invented so much as discovered. Both could visualize a product that did not yet exist down to its smallest details, and the task of development was thus akin to Michelangelo’s description of sculpture: The artist’s task was to remove the unnecessary material to reveal the beauty already contained within the stone.

Alas, Time’s cover story marked the beginning of the end. The instant movie project (“Polavision”) turned out to be a costly failure and led to Land’s resignation in 1980.

Jobs was dismayed when Land was pressured to leave the firm he had founded, calling him a “national treasure.” Jobs would suffer a similar fate after a losing boardroom battle in 1985.
Although Polaroid products continued to sell well, the shift to digital photography caught the firm unprepared and slowly hollowed out the highly profitable film business. Polaroid filed for bankruptcy in October 2001.

What is the message for investors?
The forces of competition are relentless, and today’s astonishing innovation may be tomorrow’s commodity—or garage sale castoff.

Companies that grow on the strength of their innovations can just as easily wither if they miss the boat. Just think of some of the examples:

• Research in Motion, maker of the Blackberry, helped to create the smartphone market a decade ago with its first email device.  Today, the shares are worth less than the net value of its property patents and other assets as the market believes the company has lost relevance.

• News Corporation purchasing MySpace in July 2005 for US$560M, which at the time was the most popular social networking site in the world. Then along came Facebook, which by April 2008 had surpassed MySpace – less than three years later! By October 2011, MySpace ranked 103rd in the world for total web traffic. News Corporation sold their investment in June 2011 for just US$35M – representing a US$525M loss.

• In the 1980s, Sony was the leader in personal electronic innovation. Today, Sony’s share price is almost unchanged from where it was in 1991.

• Around 10 years ago, almost everyone had a Nokia mobile phone because they were considered by many to be the best. In 2007, the company accounted for one-third of the Finnish stockmarket. Then Apple, who previously was not considered a competitor of Nokia, introduced the touch screen phone and almost overnight much of Nokia’s business model was outdated. In July 2010, Nokia reported a 40% drop in profit.

In August 2011, Apple surpassed oil group Exxon to become the world’s most valuable company by market capitalisation.

We have no reason to believe that Apple has anything but a bright future, but those of us tempted to concentrate our investment capital in a handful of exciting industry leaders or ‘good companies’ should consider the fate of Polaroid before declaring, “It can’t happen here".

References
With thanks to Weston Wellington, Dimensional Fund Advisors.
Securities Research Company, SRC Green Book, 1993 edition.
“Polaroid’s Big Gamble on Small Cameras,” Time, June 26, 1972.
“The Story of Polaroid Inventor Edwin Land, One of Steve Jobs’ Biggest Heroes,” 37signals www.37signals.com, accessed 14 October 2011.

Disclaimer
“The opinions expressed in this article are those of Stewart Group’s advisers and should not be considered as advice. Investors should obtain professional advice regarding their own financial circumstances and objectives before making any investment decision.  Under the Financial Services Act 2008 a copy of our Disclosure Statement is available on request and free of charge."