Automakers and Airlines. I just don't understand how people can invest in them. Sure, I understand that GM, Ford, Chrysler, Toyota, Honda, etc. are household names, and that I don't see America moving away from the car culture anytime soon, but it's just that the economies behind these businesses are so tough.
It is just brutally hard to make a buck.
The cost of R and D, upgrading manufacturing plants, and especially labor (with unionized labor) is just brutal and seemingly never slows. And, the efficiencies of scale needed in order to turn a profit make it mandatory to judge demand well in advance of production. If I misjudge the number of vehicles needed I either do not produce enough - leaving too much money on the table or I produce too much and even worse, I have to sell off my inventory at less than attractive prices.
Either way, the cycle of boom and bust is just too difficult.
When automakers start to do well, they expand rapidly, make huge investments in the production and supply processes and increase their workforce. Once this prosperity hits, the union leaders see this and go back to the table, often holding out for large increases in wages and benefits for their workers. This locks the automakers into an expensive cycle that can be a death sentence when the demand slows.
Next is the commitment needed to release a new model.
In order to have popular vehicles, the automakers need to keep releasing new designs. Each new design requires years of research, specialized engineering and obviously production. Marketing is another hugely important and expensive cost. The need to keep moving ahead is a perilous one.
Lack of innovation is a virtual death sentence. Look at the US automakers in the early to mid 80's. With stale releases from Ford, GM, Chrysler, etc. the auto industry was on the verge of collapse. Nobody wanted to buy domestic.
All I am saying is that the fixed costs associated with the auto industry, the need for constant and costly innovation and a very fickle (and sometimes cash strapped buyer) make this one investment I would never make.
The same applies for the airlines.
With uber expensive aircrafts they have to purchase, high labor and fuel costs, relentless fare wars, etc. - they are in the same constant battle as the automakers. The need to control costs whenever possible without giving up needed expansions to take market share - that is a difficult challenge. Unionized labor plays a major part here as well.
Now, on the flip side of this....
I love the companies that are so well branded that the consumers DON'T want the product to change. Take Coca-Cola for example. Their product doesn't change. It did once, back in 1985 and the consumer was outraged. So much actually, that they changed back to the "Coke Classic" which was another home run.
Snickers Bars, Wrigley's Gum, etc.
Cigarette producers, love em or hate em, are great businesses too.
Contrast the automakers, airlines, etc. with these cash cows and the choice seems simple to me. I will never invest in the autos or airlines. Only potential exception is Southwest Airlines, symbol LUV. They seem to have a good model worked out and a profitable niche that keeps expanding.
I am not saying that I will for sure, but it is a lot closer than any of the other dogs mentioned in the autos and airlines.
Once again, don't invest (or not) based on my ramblings. This is just a blog of ramblings from somebody who loves the market and the process of investing. I am not a professional and suggest that anyone do a ton of diligence before putting down cash!
Good Luck,
Mr.Boo 1031
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