Bean Pot Brief: Investing and the Industry Life Cycle

Industries have a life cycle just like humans . Like a person’s childhood, teenage years, adulthood and golden years, industries have distinct life stages. A local example is the Nantucket whaling industry. Let’s review the lifecycle.

1659: Nantucket settled.

1752: Start up stage. Whaling voyages begin. The market for clean burning whale oil is small but growing. Industry profits are negative and large amounts of capital are required to build ships and train mariners.

1760-1789: Growth stage. In this stage capital requirements are still high, but sales grow rapidly and profits are positive.

1790-1840: Maturity stage. Sales and profits are still growing, but rates of growth are starting to decline. At this stage, industry products are referred to as “cash cow”. It is in these years of huge profits the beautiful mansions are built in Nantucket Town.

1840-1860: Decline. The Nantucket whaling industry had a gradual decline due to the following factors.

•1840 on: Voyages were becoming more expensive and much longer, 4 to 5 years. Several of the best waters were overfished.

•1840 on: Growth of the railroads provided an efficient means to transport whale oil across land. New Bedford whaling industry becomes a major competitor.

•1846: Nantucket fire: Barrels of whale oil stored on wharfs fuel a massive inferno. Nearly all of the town’s commercial area is destroyed.

•1849: Discovery of gold in California: Many adventurous men flock to California in the hope of getting rich quick.

•1859: First commercial petroleum well dug in Titusville, Pennsylvania. Petroleum burns cleanly like whale oil and it ushers in a new energy paradigm. Petroleum would be called a “disruptive technology” today.

•1861: Civil War begins: Mariners become soldiers, Nantucket whaling industry ends.

Investors committing capital to the whaling industry would have very different risks and returns depending on what stage they first invested. Holding period is also a consideration. Early investors took huge risks but earned great return. Later investors likely struggled to earn a decent return. For the modern investor there are a couple of lessons. Allocating a portion of your portfolio to embryonic industries with large growth potential add spark to your portfolio. Be mindful of the risks, however. Also, maybe your grandfather swore by Standard Oil stock he bought in 1905, but you probably won’t have the same experience if you bought Exxon Mobil today. Industries change over time, sometimes slowly and sometimes very quickly.

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