Long ago, when I was a child, there was a local mom and pop video rental store a couple miles from my parent's house. I used to rent movies there all the time, everything from horror to action to comedy and more. It was my primary source for video rentals from my early childhood through my college years. Shortly after I graduated college I left for Boston and for many years I didn't think about the little video rental shop on the corner.
When I moved back near my hometown after nearly 14 years away, the topic of the local video rental store came up in casual conversation. My parents were still using it as their primary source for renting movies. But when the store's ancient computer systems spontaneously crashed one day, the owners wisely decided it was time to finally close. For the next few weeks they still rented movies to regular customers by handwriting their names and account numbers on slips of scrap paper! This was not a sustainable way to operate however, and was only used to buy time to organize a liquidation sale.
A little more than a month later it was all over. The small video rental store that had been a touchstone of my youth and young adulthood was gone. The little shop had weathered the VHS-Betamax format wars. It had survived the rapid expansion of Blockbuster Video, which had forced the closure of so many other small video stores. And it had made it through two different physical media transitions - VHS to DVD and then DVD to Blu-ray. In all, my local video store was in business for around 30 years, from the early 1980s until the early 2010s.
The more I thought about that small video shop, the more fascinated with it I became. Here was a completely new kind of business model - physical video rental - that suddenly burst into being, thrived for a scant two decades and then flared out of existence just as rapidly as it had formed. How could an entire industry come and go so quickly? And yet here was a prime example. If anything, my local video store did better than average, managing to stay open far longer than most of its peers.
The more I considered this imponderable the more I wondered if it applied to other industries as well. My mind immediately focused on my time in Boston. One of the asset management companies I had worked for there was a quantitative firm. This simply meant that their investment model used computer algorithms to pick the best stocks to buy. They would feed the computer a list of desirable attributes, have it search the stock market for companies with similar attributes and then buy the stocks that ranked highly on the resulting list.
The founders of this company conceived of their idea back in the 1980s. But back then the immense computing power and massive data sets necessary to execute such a task did not exist. And, ironically, it was probably this very inaccessibility that made their idea viable. There was no competition for their investment model because no one, including my former employer's founders, could easily assemble the tools necessary to implement it.
Fast forward to today, where massive computing power is plentiful and data flows like water. The Boston quantitative asset manager in question has had great success. Its founders persevered, painstakingly building the company client by client from the 1980s until the present. And yet I can't help but feel that the clock is ticking on the success of their investment model. Other quantitative asset managers have sprung up like weeds over the last 20 years. The investment landscape is very crowded and everyone is working with the same general evaluation criteria, i.e. dividend yield, price-to-sales ratio, net profit margins, etc. I suspect that quantitatively driven stock investing, a darling of the investment world for many years now, is nearing the inevitable end of its period of outperformance.
And I think this concept - that a business or investment model has a finite shelf life - applies just as surely to investment management firms as it does to video rental shops. A new idea comes into existence, but its implementation is difficult or limited in some way. No one has ever heard of this new idea and few people are initially interested. It is only after the innovative concept establishes a successful track record that it is slowly embraced. Then competitors enter the space and the formerly original idea gradually becomes accepted as conventional wisdom. Once this happens, the best days of the concept are assuredly past.
This is one of the reasons I love investing in fine art and antiques rather than traditional paper assets. It's an obscure investment model that is totally off the radar. If you search the internet for investment tips related to antiques, you will find precious few with the exception of Antique Sage. Art and antiques have been ignored and neglected for so long that no one is even aware they exist. And yet they are an asset class unto themselves, an unexplored island of profound value sitting like jewels in an ocean of overvalued conventional assets. And anywhere there is an underappreciated and forgotten asset there is a bargain waiting to be found. The clock may eventually run out on every investing strategy, but fine art and antiques still have many good decades ahead.
