Take $1.1 billion, invest it in a business, and then wait 20 years.
Now, take that same business and sell it for…just $70 million.
That’s a loss of 93.6%.
But this is more than just a big financial loss.
It’s also a terrific example of how a healthy, thriving and growing business can quickly become almost completely obsolete…
The transaction we mentioned above was the New York Times Company’s [NYSE: NYT] purchase of the Boston Globe newspaper in 1993 and the subsequent sale last week.
We’re sure that 1993 must have seemed like a pretty good time to buy a newspaper business.
OK, so circulation numbers for all newspapers in the US had fallen to 59.8 million in 1993 from 62.8 million in 1985. But the US had only just come out of a recession. Circulation numbers were bound to climb as the economy recovered.
And anyway, it was 1993; what was the alternative to newspapers? Surely not that new-fangled ‘internet thing’.
Newspapers Hit the Tipping Point
As it turns out, things would never get better for the newspaper business. Not only were newspapers losing readership to online news sources, but they were losing their major source of revenue – advertising.
After circulation declined steadily through the 1990s and into the 2000s, they finally began to fall of a cliff in 2004:
Source: Statista.com
For most of those 10 years we dare say the New York Times Company thought things would turn around. Just one small business initiative would stop the decline.
That didn’t happen. And to tell the truth it was never going to happen. Since 2003, circulation of the Boston Globe has declined by 38%. That’s roughly in line with the broader print industry.
In the 2000s the information revolution hit the tipping point. For the newspaper industry it was in 2003. After the boom and bust of the dotcom era, firms that used the internet could finally show they had a real business model.
It also happens that 2003 was when talk began about a stock market listing for the brash new internet search company, Google [NASDAQ: GOOG].
It finally listed in 2004 at USD$85 per share. It has barely looked back since. Today it trades for USD$906. That’s a 966% gain. In contrast, the New York Times Company traded for USD$41 in 2004. Today it trades for USD$11.93.
That’s a 71% drop.
Blindsided by the Internet
Where are we going with this?
Well, you can draw a few key lessons from the New York Times Company’s Boston Globe purchase – all of them relate to investing.
The biggest takeaway is that once a truly game-changing and revolutionary trend starts, it’s darn hard to stop it. Australian newspapers have fared just as poorly as US newspapers.
The situation is so bad they try to hide the declining print numbers by quoting combined print and digital numbers. But it’s not hard to do the math. The Sydney Morning Herald had a print circulation of 214,000 in 2004. Today it’s around 131,000.
Another key point is the damage to a dying business doesn’t always come from where you expect. Arguably it wasn’t just the declining readership that killed the newspaper business, but the falling ad revenue.
Think about it. Until the early 2000s, three main areas controlled the ad industry: TV, radio and print. They had an almost captive consumer.
But as consumers went online, the old media lost the captive consumer. Now, consumers may only spend several minutes a day (if that long) reading the Fairfax and News Ltd websites. The rest of the time consumers look at alternative news websites, blogs, social media websites, and others.
And because fewer people buy newspapers, advertisers have taken their business elsewhere. Newspapers have lost out to the likes of Google, Facebook [NASDAQ: FB] and eBay [NASDAQ: EBAY].
But there’s a more direct lesson for investors in the New York Times Company’s experience. And that’s one simple fact: if a bad business is a bad business then it’s usually better to get rid of it sooner rather than later.
Can Your Stock Recover, or is It a Loser?
It’s important to remember that, especially with stocks in your main blue-chip portfolio. Ask why you bought a stock. Most likely if it’s a blue-chip stock you bought it because you believed it could keep growing its business and perhaps keep growing its dividend.
If the company stops doing one or both of those things, then maybe it’s time to give up on it and look elsewhere. Of course, some companies can go through a rough patch or suffer lower sales and profits due to an economic recession.
If you think the downturn could be short term, then it may pay to hang on…or even buy more of the stock. But you should still review your analysis. There’s a chance the company’s industry is going through a seismic shift that will change its business for all time.
As we say, when the New York Times Company bought the Boston Globe in 1993, they must have thought they were smart for buying an established business with a loyal readership during a short term downturn.
That downturn turned out to be anything but short term, and 20 years later they’re selling out for a huge loss. It can be hard to admit you’re wrong with an investment. But when you’re saving for retirement you just can’t afford to follow that example by holding on to ‘loser’ stocks forever.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: The Global Trend Towards Wealth Protection
Money Morning: Two Approaches to Investing…
Pursuit of Happiness: Learning to Avoid the Governments ‘Noble Wealth Trap’
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
