Bruce Greenwald

Bruce Greenwald on Intel & some thoughts on Tech

Technology happens to be one of the toughest spaces to invest. Why? For the simple fact that this sector see one of the fastest rate of change. Take mobile devices for example. In a short span of just over a decade world evolved from landline to handheld mobile phones then to feature phones and currently, smart phones. And this is communication sector to be precise – not even core tech driven like PC or processor chipset or anything like that!

It is rare for a conservative investor to find worthwhile opportunities in this space. Probability of finding one would be like in low single digits or something I believe. But then there are few exceptions and market happens to be very charitable sometimes in handling these to us 🙂

Following is the brief excerpt I found interesting while reading the book Value Investing: From Graham to Buffett & Beyond by Bruce Greenwald which though somewhat dated by accurately portrays what advantage Intel used to enjoy over its competitors –

“Consider the competition between Intel and Advanced Micro Devices (AMD) to produce the next generation of microprocessors for desk-top computers. Because Intel has established access to customers through long-standing relationships with computer manufacturers, supplemented by the “Intel Inside” campaign, it can expect that a successful next-generation chip will capture roughly 90 percent of the processor chip market.

Even if AMD beats Intel to the market, its successful chip will, at least initially, grab a much smaller share. If Intel responds quickly and effectively, it will relegate the AMD chip to a minor-say 10 percent-market share. Thus, AMD’s spending on R&D, ignoring for the moment any difficulties it may have in financing that spending, will be paid for by future sales that are small compared to those of Intel.

Assuming that R&D spending rises proportionately with sales, Intel will be able to spend much more than will AMD on next-generation technology. In fact, Intel only spends five times as much; the difference is still potent. Provided the company doesn’t get distracted or otherwise fail to perform, Intel’s economies of scale help transform a temporary into a durable-if not eternal-competitive advantage.”

As Buffett & Munger often say, survival of the fattest!  

Despite being operating in one of the toughest spaces in the world few companies grow on to become dominant enough to improve their survival rates. And these are subtle changes in the landscape of business which one needs to lookout for.

But what comes along with it is above average levels of uncertainty and the probability of being wrong. And this is something which one needs to remember.


Niraj

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