You’ve probably heard of the Hype Cycle. But what is it, and how does it apply to long-term investing? David Gardner explains.
Rule Breaker Investing
What Is The Hype Cycle?
It's the Rule Breaker Investing Podcast with Motley Fool co-founder, David Gardner. And welcome back to Rule Breaker Investing. I'm David Gardner, your Motley host. I'm really glad that you've joined me once again this week. I'm excited to see all of the new listeners we have when I go into iTunes and I see the popularity of each of my podcasts. Whatever the most recent week was, that's the most popular one. So I take that anyway from the good people at Apple. I take that as a sign that we have a growing listenership and I'm excited that you've joined with me this week. And if you were listening last week, then you know that we talked about thinking, about thinking. And I enjoyed that a lot. And one of the three forms of thinking about thinking was pattern recognition. And what I said at the time was, next week, i.e. right now, we're going to talk about an interesting example of pattern recognition, specifically the hype cycle. And the source of the hype cycle framework is Gartner Research. And you might already know it. Some people in business, especially if you're more of a marketing type or if you just enjoy reading about different frameworks, we have a lot of intellectually curious business people listening to Rule Breaker Investing, you might know it, but many people in my experience don't know it. And even if you do, it's kind of fun to talk it through. And that's what we're going to do this week. We're going to talk about hype. Now before we start talking about the five stage hype cycle, a word briefly about hype. To me anyway, hype has a negative connotation. For example, the Motley Fool started, I know some of you were with us back in the day launching on AOL in 1994 and we were really critical of people who quote hyped and quote stocks. And we don't like that. We don't like hyping stocks because to us, it signals, usually if it's a systemic thing, it's kind of a pump and dump approach and certainly back in the early days of the Internet. It turns out even still today on the Internet, you see among especially micro cap stocks, people who are hyping them. And in general, we don't like hype. But at least in Gartner's parlance and what we're talking about this week, hype is just a thing. It is when a lot of awareness is built up about something and the consequences of that in the stock market. And that's what we're going to talk about this week. But I just want to make sure you understand that hype is a balanced word and in fact, I'm going to say a word here in favor of hype for a sec. So who is the most, if you're a basketball fan, who is the most hyped professional basketball player of our time? And I have to admit, I don't watch much national basketball association NBA basketball, but I'm pretty sure it's LeBron James. I might ask at the same time, who is the greatest basketball player of our time? And while I'm not a huge student of the game, I think a lot of people would say that LeBron James is if not the best, certainly one of the very best, one of the top basketball players of our time. In my experience, often hype is built up appropriately. The big hyped singer on the voice or American idol or what's the most hyped social media platform you can think of today, Facebook, often this is kind of related to merit. Often the things that are the best get a lot of acclaim, not always. There's some hidden gems out there, but I want you to understand that hype to me is often justified. And in the case of what we'll be talking about this week, you'll see why. All right, enough about hype. Let's go to the five phases of progression of the hype cycle. So number one, every hype cycle is touched off by the technology trigger. That's what Gartner research calls it. I'm using their terms for this podcast technology trigger. That's what starts the hype. So the human genome project started a lot of hype. 3D printing started a lot of hype, cloud computing. The list goes on. I'm sure you can come up with some of your own. I love video games. So whenever there's a new console, a new cycle of consoles like the PlayStation 4, that's a technology trigger creating hype. Twitter itself, Twitter itself, really interesting new platform, a lot of hype around there. New technologies are developed inevitably in an innovative economy. We all want this in general. They're pretty cool. They create some great solutions, often some superior solutions because they exist. And so they just happen. And that's what sets off the hype cycle. So phase one, technology trigger, which takes us to phase two. This one Gartner calls the peak of inflated expectations, phase two. So this is when all that dreaming about what the human genome project could do, or what 3D printing can do. Whatever the technology trigger is, as we all dream together, maybe it was on the cover of Time Magazine, or you heard your friends talking about that new technology stock that they bought, whatever it is, all of that dreaming that builds upon itself inevitably becomes not just dreaming, but expecting. After all, we've seen in our own lifetimes how many early emergent technologies have become an amazing gain. I just think of Skype versus pay phones in the generation I've been alive, how I called my parents from college and how my kids call me. And it's a darn sight better today. In fact, speaking of sight, you can actually see your college student even if they're halfway across the world for free as often as you want today. So we've seen so many technologies come along and improve our lives that it's natural that you start to expect something great from that new technology. So the problem is, of course, that technologies usually are not nearly ready to deliver those expectations that were born of dreams and hence, phase two, the peak of inflated expectations. And this is, in fact, the peak of the hype cycle. In fact, ironically, the visibility for this technology, whichever one it is we're talking about, will never be greater than at this very stage. We're going to go on to talk about the next three stages and how good technologies do become adopted, but ironically, there will never be more buzz about that thing than right at this stage. In some ways, it's funny because I think back to my own company, The Motley Fool, and I don't think we ever got more publicity than in our fourth or fifth year when my brother and I were on the cover of Fortune Magazine. We were regularly on all kinds of talk shows. Part of it is we were writing books back then, but that's when I was on the Today Show and Charlie Rose and Good Morning America. And everything we do at The Motley Fool today is bigger and more successful than back then. But we probably never had more visibility and may never again because of the hype cycle, because of the peak of inflated expectations, what people thought the internet could do back then. The Motley Fool anyway was a big fish in a very small bowl at the time. But this isn't just true of my company 15 years ago. This is true of all technologies, the peak of inflated expectations hits, which naturally then takes us to number three. In the third stage, again, Gartner's terms, I like them all, the third stage, the trough of disillusionment, booms often go bust at some point, and especially for things that stay in the game over the course of time. Let's take Amazon.com stock. That stock has boomed and busted multiple times over a couple decades, but booms, especially when we're talking about inflated expectations go to bust, and that's what happens in the trough of disillusionment. So that technology's immediate impact, we start to realize, was clearly overstated. And so there's a collective turn against it, headlines, media, consumers. In fact, a tremendous amount of cynicism is usually born during this period. We're looking backwards, thinking about all that hope, all that hype, sometimes just a year ago, seems now ridiculous, maybe even embarrassing to think what we thought at one point, one recent point, in almost a form of self horror, one recent point we all thought would actually happen. Did we really think personalized medicine was going to happen shortly after the Human Genome Project? Did we really think that 3D printing would instantly create everything from airplanes right through to medical solutions? And the answer is, we did. And as we're going to cover the next two stages, you're going to see that these things are for real in some ways, but this is the trough of disillusionment that we're talking about. And that is, of course, phase three. Oh, one more thing to say about that. You know how I just said that at the peak of inflated expectations, whatever the technology is, will never have more hype and awareness than right at that moment? Well, conversely, right here in the trough of disillusionment, it is from this point that we're actually all up from here, because the world will never be more disillusioned, more cynical, and more clearly thinking that it was wrong about this technology than right at this point. Number four. Number four is the slope of enlightenment. So during this phase, you've now gotten to the point where this technology is actually being used, has actually been deployed, and now we're able to see as consumers or technologists as business people ourselves, we're actually able to see the actual ways that this technology is being adapted will be manifest for all of us and for our society. And really, at the heart of the slope of enlightenment is the word acceptance. Acceptance ensues. Overall, if it was really a substantial world beating, earth-breaking technology back there in phase one, probably it is going to have some meaning, right? While people's expectations go way up and way down, presumably we're talking about, in the case I talked about earlier, console cycles, or I talked about 3D printing or the human genome cloud computing, these things are actually really important and real, and it's during phase four that we're all a little bit enlightened. We come out of the trough and we realize, yes, this is for real, it is now being used. And let's keep moving here. By the way, right after I do this, I'm going to go back over each of these briefly and give some examples of things of where I think a few things on our minds are today. And then I'm going to close with a few reflections overall about this framework from Gartner. All right, number five. Number five is the plateau of productivity, and this is the end of the hype cycle. This is where we've become smart implementers and practitioners of this technology. So we're now standing on the plateau of productivity. It's a plateau. We can see a long way ahead of us. We can see a long way back and looking back, we're able to see, yeah, it really was hyped when you think about it. I mean, people did expect too much of it back in the day and all those magazine covers and conferences and big stories about it were in fact way too early in some cases, or in some cases unrealistic. However, we can now also look around us and say, wow, how relevant it is, how visible it is in our society today, whatever that technology is. And somewhat ironically, I just said how relevant and how visible, but one other aspect of the plateau of productivity is that ironically, it's nearly invisible in some ways. In other words, it's become well practiced enough and well implemented enough that we kind of take it for granted at this point. And that's the long plateau that continues by the way to close this little song and dance until probably that technology gets itself disrupted or maybe loses relevance like the horse and buggy or just continues on forever because maybe like e-commerce, it doesn't seem to be going away anytime soon. So that was a short summary, well, not that short, took about 10 minutes or so, but that's a short summary of Gartner's hype cycle. And now I just want to quickly trace back over each of those and give you some examples of where I think things are today. So back to tech triggers and I just have two quick ones for you today to think about. I would say that virtual reality is very much in technology trigger phase. I think we all kind of expect that in fact the Oculus Rift and Microsoft's HoloLens and there are going to be many other examples of virtual reality headgear. I think we can all take for granted that that's a really important technology. I've been saying myself, when a new medium dawns, huge value creation ensues. When the internet showed up about 30 years ago, huge value accrued over the course of time. I think I can say it about virtual reality as well. This is a big important new medium. Another example, how about cures to cancer? I think we're seeing this happening. We're seeing the possibility of it happening. There are a thousand different cancers so there's not a single cure to cancer but immunotherapy looks very promising. We have some of those stocks in Motley Fool Rule Breakers for those of you who are members of our service. So these are technology triggers that I think we can all say with a high degree of confidence are pretty amazing and are happening. And I don't think either one has yet reached the peak of inflated expectations but let's next move there and talk about a couple examples of things that we might be expecting a little bit too much of right now and a couple come to mind. How about autonomous cars? Self-driving cars. I love these. The prospect is beautiful. I do think it's going to happen. Many lives will be saved as this technology eventually deploys itself. But I don't think it's going to happen quite as fast as everybody expects and there's a lot of talk these days. I mean, when I was first talking about this, maybe in our Rule Breakers service several years ago, it seemed crazy at the time and some people were willing to listen to it. And by no means was first out on this topic at all. In fact, Google was because they were already experiencing it and demonstrating it by putting hundreds of thousands of miles on cars out in California. But I think at this point, everyone kind of knows that it is going to happen. But I think we may be expecting it a little too soon. Another example I would just say mobile in general. The mobile revolution has been huge. It continues to be huge. But I feel like there's so much focus on it that maybe we think a little bit too much that everything is about mobile and that's where all the growth is. I really say all these with hesitation because as you'll find out at the end of this podcast, I don't think or try to really call these much myself. We'll talk about that in a sec. But I'm just thinking about things that I think have been built up for quite a while now and are real near maybe the peak. I would also say something like internet banking itself is it's an obvious thing that bricks and mortar banks aren't as effective as internet banking and so on, on a smaller level. This one might be one where we're like, we have a few of these stocks and they're very good and I like them for the long term. But I think it's obvious enough to enough people now that it's a superior model of banking to the cost of bricks and mortar that maybe we're expecting a little bit much from the world all going that direction. All right. Number three. I'll be even quicker this one. The most obvious technology that I can think of right now that is in a trough of disillusionment is 3D printing. I don't think there's any question I have. We've been recommended these stocks. We actually recommended them back in phase one and we had really good returns up until about three to six months ago. But the the real trough, I think we're at or near. There's no question in my mind that 3D printing is a very consequential technology additive manufacturing. Some people call it. This is a profound development and will be for decades going forward. But many of those stocks have lost 60 to 80% of their value and I think we're getting near the trough of disillusionment. And as a shareholder, I got to say, maybe it's just wishful thinking. I kind of hope. All right. Number four. The slope of enlightenment. To me, let's go with data centers. I think, you know, a lot was built up. There was a lot of hype about how cloud computing was going to be largely deployed and made possible by data centers and Amazon.com. I think got kind of hyped up a lot about Amazon Web Services and some companies like Equinix and some other companies that are data center companies. I think that, you know, Rackspace kind of crashed as a stock. I think we've kind of moved on and realized that data centers are very much for real. And we're all being enlightened that they're going to be around for a long time. That might not be my best example. I admit some of these are scratched down on little green post-it notes that I wrote just before this podcast. So maybe you have a good example yourself, but I'll try that one. And finally, number five, the plateau of productivity. And to me, a great example is e-commerce because I remember e-commerce from all five stages. When we first started the Motley Fool, one of my early press interviews, I was on CNN and it went something like this, coming back, we're going to have David Gardner, co-founder of the Motley Fool, and he says that people will give their credit cards over the internet back after this. And that was the premise of that CNN appearance. I was essentially an apologist for e-commerce at a time that it seemed preposterous to many people, go back and check those magazines and headlines and stories, maybe check your own feelings at the time back in the mid-1990s. There was a fair number of people who thought this will never work because people will not trust giving their credit cards over the internet. And we certainly lived through the rise and inflated expectations about what that would be and what e-commerce was. And we watched Amazon rise way up and eBay at the time. And then they crashed hard into the trough of disillusionment, 2001, too. And now people don't really use the phrase e-commerce much anymore or it's not a thing because it's so implicit in so many companies today. E-commerce is such an obvious thing that we don't really even talk about it as its own thing anymore. So anyway, for me, there's an example, the plateau of productivity. Okay, just a few thoughts as we close. These are investing thoughts. The first is that if you like my style, if you enjoy this podcast, if you've been a Motley Fool member for one or more years and you've followed how I invest in what we do at the Fool and especially what I do within the Fool, which is very Motley. What I do is I kind of inevitably find these kinds of companies often early on. And so I end up suffering through this hype cycle repeatedly. Why? Well, I'm looking for game changing technology, products, services, practices, business models. I love the innovators. I love the companies that to use Shakespeare here. This was Glendauer's great phrase from Henry IV Part 1. If I remember my undergrad English well, my Shakespeare course in Glendauer says at one point, it's somewhat ironic, but I'm just going to put it straight to you here. He says, "I saved the earth did shake when I was born." And he's kind of bragging. It's a funny line at the time. But that's the way I think about the companies that I'm looking for. I love the companies that truly do shake the earth a little bit when they're born because what they're doing is dynamic and important and disruptive. So we're going to end up finding these companies repeatedly over the course of time. Thought number two, since I am never the short-term player, I don't systematically or cynically sometimes sit back and say, "All right, we're nearing the peak. We're nearing the peak. And I'm going to sell just before we hit that peak of inflated expectations and everything comes crashing down." Now, if I were really awesome, if I could do that consistently, maybe I would do that. But in my experience, the big money and the best stocks that I've recommended, which I know some of you have owned along with me over the years, are the companies that we find in phase one and we hold them through all five phases. Amazon.com is a classic example. We bought it at $3.21 in 1997, watched it go to '95, watched it drop to '7. I hope you're hearing the hype cycle running underneath this and slowly but surely over the course of time, Amazon went back from 7 to 70 to 200 to 400 to around 540 or wherever it is today. So this is the way to really make money in the market, not to try to time things or be cynical and watch the hype and sell out before and play chicken with the market, which I don't think I'd be very good at, but instead, to just find the greatness and hold it all the way through. By the way, some people are very good at that. I would say Mark Cuban, for those who know them, he started broadcast.com and as an entrepreneur, he beautifully timed his sell of his company to Yahoo just before everything came crashing down. Today, Mark Cuban, I think, owns the Dallas Mavericks basketball team and he's widely regarded as a very successful businessman, which I think he is. He's better at timing things than most of the rest of us and he's certainly better at timing things than I am. But I also love the things that really persist over time because I think we make the most money. We find the technologies that don't just trigger, but really truly improve the world, reshape the world over years, not months. So I hope you've enjoyed learning about the hype cycle and our retrospective of some of the technologies and stocks that we've looked at over time and how I like to frame things up as we proceed forward with an increasingly innovative world with more and more new technologies and how the world treats them. By the way, if you like this framework, do read a little bit more about it from Gartner and actually, Gartner Research does a nice job of mapping some of the technologies that you hear about today on its own hype cycle. So if you click around the internet and you find yourself enamored of this, you can see lots of different people's views, including Gartner's, about where various technologies are on the hype cycle. Well, listen, that was the hype cycle this week. Next week, well, I'm of two minds. In fact, I have two directions I'd like to go and we're just going to have some fun in the coming week. You're going to tell me which one we're going to do. So next week, I'm either going to go over five of my very favorite quotes, great quotes about business and investing and what they mean for us as business people and investors. That's option one or option two, I'm going to talk about the capitalism that wins, what runs under the best businesses. I'm going to enjoy either one, but I want you to help me choose which one we're going to do. If you're not already following us on Twitter, we're at RBI podcast. And if you aren't already, please do follow us. And in the next day or so, we're going to tweet out, both of these options and all you have to do is click the little yellow star and favorite the one that you'd like me to do next week. So we're gamifying how to do this podcast, at least for next week. Help me decide. Will it be great quotes, volume one, or will it be the businesses that win? I'm David Gardner. Thank you so much for joining me this week. Happy investing in the week ahead. Fool on. As always, people on this program may have interest in the stocks they talk about, and the Miley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com. [MUSIC] [BLANK_AUDIO]