Value’s long-playing lesson from the revival of the vinyl record
The unlikely comeback of the vinyl record illustrates how, just like markets, human tastes and trends can often evolve in a cyclical rather than linear pattern
Released in 1985 and aimed predominantly at the CD market, Dire Straits’ fifth studio album Brothers in Arms, which has gone on to sell more than 30 million copies worldwide, is generally seen as having sounded the death knell for vinyl records.
Whatever the reality, by the start of the new millennium, sales of vinyl barely registered on the scale in comparison with cassettes and, particularly, the all-conquering compact disc.
Fast-forward 18 years, however, and the trio’s fortunes have changed dramatically. Demand for cassettes was effectively wiped out in the early 2000s by CDs, which themselves have steadily lost market share to MP3s and, more recently, streaming services.
Vinyl, in stark contrast, has been making something of a comeback – to the extent that sales in the US this year are expected to exceed those of CDs for the first time since 1986.
So we learned recently from an Economist article, headlined The strange revival of vinyl records, which suggests the prediction “The LP will be around for a good long while” was not quite as overly optimistic or wilfully short-sighted as it may have appeared when the then spokesperson for the Recording Industry Association of America offered it back in 1989.
Certainly if, 20 years ago, you had suggested vinyl would be outselling CDs in 2019, most people would have laughed at you – after all, surely progress does not work that way.
That is true to a certain extent – as we noted earlier, CDs themselves have now been largely replaced in the affections of the music-listening public by streaming services, such as Spotify – but, then again, tastes and trends are often cyclical rather than linear.
Disruptors can be disrupted too
This holds true in markets as much as it does in music – indeed, as a strategy, value investing is partially built on the idea markets have a tendency to extrapolate the current health of companies and sectors into the future.
Or, to maintain our music theme, investors will often ignore the fact that, like vinyl, struggling businesses can and do recover while, like CDs, disruptors can and do find themselves disrupted.
When disruptors get disrupted too, then, as we have argued before, they can become value stocks. “While acknowledging disruption can indeed cause what you might call a ‘profit gap’ or an ‘upside gap’,” we continued, “we would strongly argue it does not negate value cycles and it should not stop value investors from making good returns when value as a strategy turns.”
Furthermore, as we suggested in Profiting from tech companies, there is no reason why value investors cannot make money from ‘disrupted disruptors’.
There, we highlighted the ‘Gartner Hype Cycle’, at the heart of which is an acknowledgement of the way people and markets tend to overestimate the change that is going to happen over the next year or so, yet underestimate the change that is going to happen in, say, the next decade.
Tastes evolve, cycles turn and disruptors get disrupted – and investors who do not acknowledge such possibilities risk ending up in a whole other kind of ‘dire straits’.
Juan Torres Rodriguez
Research Analyst, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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