< Index For This Edition > < Subscribe To The Daily Reckoning >

When the 20th century opened, said Winston Churchill, "humanity was informed that it could make machines that would fly through the air...

"The whole prospect and outlook of mankind grew immeasurably larger, and the multiplication of ideas also proceeded at an incredible rate...

"While he nursed the illusion of growing mastery and exulted in his new trappings, he became the sport and presently the victim of tides and currents, of whirlpools and tornadoes amid which he was far more helpless than he had been for a long time."

It was on Dec. 17, not long after the turn of the new century, that Orville and Wilbur Wright demonstrated that the promise of air transportation was real. On the windswept banks of North Carolina, for the first time in history, an airplane got off the ground and completed a controlled flight.

The promise was very real. Airplanes worked. And three decades after the birth of airplanes, they were over Churchill's wartime bunker in London, dropping explosives on the city.

You may remember an astonishing bit of information in these letters a few weeks ago. Actually, I was reporting a comment made by the most successful investor of our millennium -- Warren Buffett.

Buffett stated the obvious: that investors, as a group, cannot expect to make more from their stocks than the companies themselves make in profits. That's all there is.

Steve Sjuggerud confirmed that insight with his calculation of actual stock market returns over the century. All investors as a group made was 5.25% -- before inflation. That figure is about the same as the average level of earnings over the period...and about same as the average GDP growth...and not too far away from the average return on debt instruments. No reason to put too fine a point on it -- investors who expect to get rich by being "in the market" had better live a long time. Five percent...before taxes and inflation...takes a long time to compound into real money.

Most investors are aware of this...so rather than merely being "in the market," they try to find the stocks that will beat the market. And one of the approaches to doing so...about which we hear so much these days...is investing in new technology. And if ever there were a new technology that captured the hearts of investors (their minds escaped untouched), it is the Internet.

Yet Buffett reminded us that new technology does not necessarily mean higher rates of profit. In fact, the air travel industry, as great a technological and commercial success as it was, never made investors a dime. Instead, the whole industry did to investors' portfolios roughly what Hermann Goering's planes did to London.

The industry was so competitive that airlines regularly lost money and went bankrupt. One company, Continental, when bankrupt twice.

Today's airline industry is the Internet. We know it works -- we can order Christmas toys. But we don't yet know how much damage it will do.

An article in "Forbes" this week shows how hard it is to make money betting on new technologies. First, it is almost impossible to know if the technology will actually work. Second, even if it does work, it may never find a successful commercial application. And even if it overcomes that problem, the company you buy may turn out to be a loser for other reasons.

Allen B. Dumont Laboratories pioneered the television. But it went out of business.

In the early '70s, the Wankel engine looked like such a hit that investors bid up Curtis-Wright's stock from $3 to $13. But the engine still waits to get cranked up.

Another engine development, Orbital Engine's direct fuel injection for two-stroke motors, never caught on. Nor did the gas turbine, nor the ceramic diesel. 

Superconductors were supposed to change our lives. Where are they now? And where's the new flat-panel display...that quadrupled the price of CopyTele shares in the early '80s? The price of the stock has fallen by two-thirds...18 years later.

Willis Carrier's air conditioning was certainly a big hit...at least in the summertime. But the Carrier Corporation never produced extraordinary profits for investors. 

And where's the cure for cancer that Entremed promised? The stock went from $12 to $51 on the first day of trading. Now it's $23.

At least five major drug companies were on the verge of a cure for sepsis a few years ago. None was ever able to make it work.

By contrast, the Internet has shown itself to be capable of doing at least some of the things that it promised. Like airplanes. 

But, like airplanes, the more effective a new technology is...the more damage it can do. And the more it seizes the human imagination, the more the mind takes flight.

"We took it almost for granted that science would confer continual boons and blessings upon us," Churchill explained. But it "was not accompanied by any noticeable advance in the stature of man, either in his mental faculties or his moral character. His brain got no better, but it buzzed the more..."

Nearly every home and office in North America is abuzz with the wonders and promises of Internet stocks. Who can hear the approach of the Luftwaffe over all the noise?

Bill Bonner

* * * * * * * * * * * * * * * * * * * * * * * * * * * * 
The Daily Reckoning is a FREE e-mail service of Agora Financial Publishing -- dailyreckoning@agora-inc.com If you would like practical advice on how to act on the ideas in this e-mail, then simply subscribe to my monthly financial communique, "The Fleet Street Letter." You can subscribe or get more information easily. Just call 1-800-433-1528 and ask for code 3472.