The economy as a three-act opera

All the world’s a stage and we are all idiots, imitators or innovators

By Morf Morford

Tacoma Daily Index

Warren Buffett once observed that business breakthroughs follow a self-destructive, almost operatic set of scenes; a three-act formula inspired and energized by the three “I”s: First come the Innovators, who launch something original, then the Imitators, who cash in on the idea, and finally the Idiots, who bring it all crashing down.

You could almost think of any development, trend or invention as something like a gathering storm; the disparate elements accumulate, build on each other, hit a critical mass and hit with an unexpected impact.

The product itself rarely, if ever matters.

It could be fidget spinners (remember them?), GameStop stock or certain Dr. Seuss books; it’s the process, the inexplicable momentum, that takes us by surprise – and offers the promise of wealth.

One day these items barely exist, or have little meaning to us, then they are super hot and of values many multiples greater than we could have imagined, and then, just as quickly, they recede back into irrelevance.

Like a master surfer, we need to catch the wave as it quietly builds.

Once it crests, like the “idiots” in Warren Buffett’s scenario, it’s far too late.

We might make some money at this stage, or like the proverbial surfer, we might get thrashed around by elements we never understand or even come out battered or not at all.

How many investors in AMC or GameStop lost everything? And how does that compare to the few who won anything?

I sold one of my Dr. Seuss books several months ago. It sat on my bookshelf for years, decades perhaps, then after languishing, and being looked at by generations of toddlers, I sold it for $600. Other copies, in worse condition, sold for more.

Maybe that market was just another example of “the greater fool” philosophy (you are not a fool if someone else is willing to pay even more for it – sort of like the child’s game “musical chairs”).

Who knows, for example, if all those people who spent $600 (or more) for a Dr. Seuss book are glad they made the investment?

Maybe I’m a cynic, or what used to be called fiscally responsible, but I must admit that I don’t have a lot of confidence in an economic system based on an abundance of “fools” or “idiots”.

This “micro” system of gadgets, toys or shorted stocks, is of course, only a subsection of the larger economy.

The larger, “macro” economy of global oil prices, interest rates and international trade often reflects the same pattern – just larger, slower and more cumbersome.

As with the more familiar scale, some technologies replace others.

One area of shifting for example, is the clumsy, hesitant move away form fossil fuels. For a variety of reasons, this shift is, eventually, inevitable.

But our transition, as necessary and obvious as it might be, will also be incredibly awkward, threatening and expensive.

Change is never easy. Admitting that you paid too much for GameStop stock or a Dr. Seuss book may never be something we’d like to admit.

But it should be something we learn from.

Do we want to be the last one stuck with an obsolete technology or can we pawn it off on the next “fool”?

Consider Warren Buffett’s three “I”s – Innovators, Imitators, and Idiots.

Each one is essential in the economic ecosystem.

For the most part, the innovators do the most work and risk the most, the imitators see a trend coalescing and jump in, risking little, but adding to the “critical mass” and popular appeal, while the idiots see a movement fully formed and assume that it will stay that way.

And of course it won’t.

Any trend, by definition, is temporary.

Some trends return (like vinyl records) but that “return” is itself a trend and also won’t last forever.

Some trends, like compact discs, DVDs or social media, even combustion engine automobiles, seem like they will last forever.

But they won’t.

Over the long term, and sometimes remarkably short times, the life-cycle of a product or trend emerges and evaporates right in front of us.

Buyer’s remorse, in every category, from gadget to over-priced home, is part of the learning process of each one of us.

Being stranded, or stuck with an “unsupported” orphaned technology is an occupational hazard of life in our times.

You might think of these three categories (idiots, imitators and innovators) as comprising a pyramid with masses of “idiots” at the bottom, a good number of imitators in the middle and a few (very few) innovators at the peak.

As investors, or even just as consumers, maybe we can sharpen our senses and, as difficult as it will always be, perhaps move up a category in Warren Buffet’s schema and stop being an “idiot”, maybe be more of an “imitator” and just possibly, with our hard-won experience, make our way into the innovator category.

As individuals, as a society, even as a species, it’s crucial to our survival to move up a notch.

We can do it.