The Diffusion of Innovations & what it means for property investors

Variously referred to as lighthouse customers and trendsetters, early adopters are consumers who, behind innovators, move with the times quickly and are among the first to buy innovative products when they come to market.

Eventually, as products become commonplace on the market, the early majority join the stampede, followed by the late majority and eventually the laggards accept that they too must join the crowd.

We were never early adopters in my family. While fancy package holidays in the Spanish islands became increasingly available, we camped in the rain in Wales.

While school friends showed off their lavish, alphabetically-sorted CD collections, we struggled on with a cassette player which relentlessly mangled C90 tapes.


 Advantages of not being an early adopter

Despite initial appearances, there are advantages to being in the early or late majority, however. New products, particularly white goods, tend to be very expensive yet can become markedly cheaper as the market latches on.

Early adopters can also be caught out if they buy the wrong product which is superseded or becomes obsolete.

Some school friends had Betamax recorders, a clever home video system developed by Sony, the tape of which looked like the Greek letter Beta as it ran through the transport.

But there were some problems with Betamax. …

There was no guard across the tape, for example. The format was quickly replaced by the rival VHS which had longer play time of up to four hours and more than one speed. Betamax attempted to dictate the market standard format, but by 1980, 70% of the North American market was using VHS. The triumph of VHS over Betamax is now a standard marketing case study at business schools.

So, it’s well known that those who bought Betamax lost out.

Interestingly, though, as times move on, the VHS format has also become obsolete. So while it can pay not to rush into the latest “big thing”, eventually we all have to move with the times. Early adopters may get the benefit of early use of a product or idea, but the price they pay for their head start is that are also effectively a “guinea pig”.

We learn more from mistakes than successes

In a quiet business park near Ann Arbor, Michigan, there exists an odd type of supermarket, known as the ‘Museum of Failed Products’.

It is home to just one sample of all manner of consumer items which never caught on, such as Pepsi AM Breakfast Cola, caffeinated beer (!), Clairol’s yoghurt shampoo, Gillette’s similarly unpopular “For oily hair only!” and and toaster eggs.

The founders of the Museum realised in 1998 that product developers spend so much time focussing on their success stories, that they forget to look at what can lead a strategy to fail.

Companies visiting the ‘museum’ are often flabbergasted to discover some of their own failed products on the shelves of which they had retained not one sample!

Just as weightlifters ‘training to failure’ do not see this as an admission of defeat, those who have the flexibility to incrementally learn from failures rather than simply throwing good money after bad tend to be winners over time.

Investment – finding quality

It’s true that the principles of investment and wealth creation remain the same over time, which is why there a number of fable-type books on the shelves showing how people reap what they sow. But the specifics of investment do subtly shift over time.

The trap to avoid is being the guinea pig, the early adopter of the latest fad who gets caught out.

The examples are too numerous to list, of course, but I’ll throw you a couple.

Before the early 1990s it was possible to buy stocks on the London Stock Exchange and pay for them (settle) up to 10 days later. Naturally, people bought in the hope of a stock price rise in the intervening period.

As the internet and brokerage sites became freely available this evolved into day-trading, and a glut of books became available to teach you that by trading the big telco stocks and taking one sixteenth (or ‘tick’) out of each trade you could beat the commissions and grind out a few dollars each day.

Most didn’t succeed.

Then came the tech stock bubble of 1997-2000, when all you needed was a stock code, a few bucks and a brokerage site and anyone could get rich. The old rules could be thrown out! We all know how that ended for the early adopters.

Interestingly, the fallout from the tech stock crash saw the Reserve Bank’s cash rate tumble from its very high levels of the 1990s to just 4.25% by 2001 and the new fad here in Australia became ‘positive cash flow property’.

The idea was that by finding property in remote locations or tourist areas you could force residential property to become an income asset, making a few dollars each month from the tax rebates. The new angle was that the search for capital growth as the key element of returns was not only guesswork, it was also a myth. All you needed was to buy in far flung parts of the country and live off the few dollars of income stream.

Then there were property options, and flipping strategies, and buying off-the-plan in North Queensland, and…

What for the future?

As someone who doesn’t eat meat or fish, I like to think that in the coming decades further food product scandals and a recognition of the destructive effects of the animal industry on the environment, vegetarianism will become commonplace.

That doesn’t make me an early adopter, of course. Veggies have been around for centuries, but slowly there will be more of us in Western nations.

I also think we are likely to see businesses which embrace green energy and technology flourish.

Successful investors will be those who identify the emerging demographic trends and allocate capital accordingly.

There have been too many fads come and go in the world of stock trading, but you’ll never be able to go past investing in a reasonably well diversified portfolio of quality, sustainable and profitable industrial companies.

Industries that will grow?

We’re aging as a nation, so try healthcare. I don’t spend too much time trying to identify which companies to buy, though some are better than others – through LICs and index funds I own every Australian and British healthcare company worth owning.

As for property…

Well, as interest rates increased between 2002 and 2008, the positive cash flow brainwave lost popularity as investors understood that it is capital growth which creates wealth in property investment. It always has been.

There will be severe headwinds ahead for a number of mining towns as vacancy rates increase and the mining construction boom passes its peak.

How much better to be invested in a part of the country where the population increases by the population of a mining town every year?

As an investor for the long term rather than one trying to latch onto the latest fad, you can sleep very soundly at night as demand increases in perpetuity.

In respect of demographic trends…

The average household size has fallen dramatically over the past century.

Look for the property types that are increasingly in demand with younger home buyers and downsizing Baby Boomers, and listen to the radio news reports of 2-hour traffic delays in the capital cities.

Own quality, prime location properties for the long term near train links and transport hubs and you will have adopted a wise investment plan.

Graph: 7.43 Average household size

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is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

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