Investment blogger Morgan Housel recently wrote about "long tails" — those unusual and unexpected outcomes that can either be deeply destructive or greatly rewarding.
The sudden collapse of energy giant Enron in 2001 is an example of the former. The decades-long mega-success of Amazon, once a small online bookstore, is a case of the latter.
Other "long-tail" winners spring immediately to mind: Facebook, Apple, Microsoft, Google.
Morgan Housel notes that once a company emerges as a winner, its very success tends to attract even more investors and customers, along with top-quality employees. As a result, the winners tend to keep on winning.
Most competitive fields have strong feedback loops: Losers keep losing because no one wants to be associated with losers, and winners keep winning because winning opens doors, and open doors beget more open doors.
Amazon is successful in part because it has cheap capital, and it has cheap capital because it’s successful. Sears, on the other hand, has virtually no shot at redemption.
In many industries, customers do not want the fifth-best product. Talented employees don’t want the fifth-best employer. They want the best. So winning accrues to just a few.
Looked at from an SMI perspective, Housel has described why a momentum-based investing approach works: winners tend to keep winning — at least for a time. And it can be quite a long time.
To be sure, not all successful companies are huge winners like Amazon and Google. It is also true that even big winners can stumble, as company leaders make missteps or navigate marketplace transitions. Once-successful companies can even fall by the wayside (note the mention of Sears above).
Perhaps someday your great-grandchildren will ask, "What was Amazon?" Nothing lasts forever. But fortunately for momentum investors, as winners fade, new winners eventually emerge, providing an opportunity to win along with them — at least for a season. Sometimes a long season.
