Although this article is a little bit different from the others here on Modern Times Investors, I found it an interesting case study that offer insights on how value to customers and user experience reflect on stocks performance.
Today’s analysis is about an idea from the company Teehan+Lax, a former UX design company interested in solving complex UI and UX problems that ended up joining the Facebook design team.
Back in the era when mobiles were mainly used to make phone calls, Google had just released maps, MySpace had more users than Facebook and blackberry was the top phone, this company had an investing thesis to test:
Companies that focus on delivering great user experiences will see it reflected in their stock price.
This is the story of the UX Fund investing experiment.
The UX Fund
If you think about the statement above it makes a lot of sense: companies that deliver great value to customers should reap the benefits from their products and services.
In that period, companies started to take design very seriously and began to offer more pleasant and functional systems to solve real problems into a pragmatic way.
What they did at Teehan+Lax in 2006, was to select 10 companies they thought were doing a good job delivering excellent experiences to their users.
How did they choose? The criteria were essentially that the companies had to demonstrate care in the design of their products, have a history of innovation and inspired loyalty in their customer base, customers positively satisfacted from their experiences. (Here’s the link to the original blog post by the company)
Once the companies were identified, they invested $5,000 each for a total amount of $50,000 without rebalancing the portfolio for an entire year regardless of performance and market movements.
Those are the companies that were selected back in 2006 by Teehan+Lax for the UX Fund:
- Apple (AAPL)
- Google (GOOG)
- JetBlue (JBLU)
- Netflix (NFLX)
- Nike (NKE)
- Progressive Insurance (PGR)
- Target (TGT)
- Yahoo! (YHOO)
- Blackberry (BB)
- Electronic Arts (EA)
UX Fund performance after 1 year
Sticking to their plan, as the fund matured, after one year they sold all their positions gaining an interesting return.
After one year later, the initial $50,000 investment had grown to nearly $70,000 with a total performance of +39.3%!
39.9% in a single year is a remarkable return, but what’s even more interesting is the fact that the fund outperformed all the market indexes.
UX Fund: 39.3%
The Nasdaq: 29.1%
Nasdaq 100: 28.7%
S&P 500: 10.3%
In that period the market was strong, but the UX Fund outperformed it by a good margin anyway.
UX Fund performance after 10 years
Even if the holdings of the fund were all sold after the first year, it’s interesting to see what would have been the performance if the stocks were kept in the fund.
Over 10 years, from 2006 to 2016, 9 out of 10 stocks gained and the whole portfolio had an overall return of 450.14%, a final value of $250,044.52 with the initial investment of $50.000.
This is even more interesting if we consider the NASDAQ performance over the same 10 years, from 2006 to 2016: 93.2% vs 450.14% of the UX Fund.
This experiment proved the point and the hypothesis was successfully tested: Companies that focus on delivering great user experiences actually see it reflected in their stock price.
One could argue that this fund hasn’t a scientific investing approach or that rebalance is an essential part of portfolio management.
That’s ok, but even with this kind of capital allocation the results show that companies that craft well design products and services that solve real problems for real people actually generate value that reflects on business performance.
One of the key realization from the UX Fund experiment is that from outside is sometimes difficult to identify good design when it’s new.
Perhaps the companies were so successful because they had great visionary leaders, or were first movers on big ideas, or had little-to-no competition, or were able to put a lot of bets in market and find the huge wins. Those could all be explanations and there could be millions other reasons why or why not.
The common characteristic is that their focus was consistently creating great user experiences for their customers.
The other important takeaway from this experiment is that companies were selected by focusing on the business. While many investing strategies have little or no focus on the business, it is well known that the quality of the business is the driver of long-term returns. This is also one of the foundation of the value investing approach.
The biggest movers in the UX Fund are more than UX leaders, they are world-class innovators that explored new markets and disrupted entire sectors in a single decade.
Focus on innovative companies is also very important, 40% of today’s Fortune 500 won’t exist in a decade’s time.
Technological progress is running fast and exponential technologies are transforming the world at a speed never seen before.
Right now, companies across every sector are re-inventing themselves and over the next decade we will be able to see disruptive innovations where the big movers will be those who invested in transformative innovation and improved user experience.
This article is for informational purposes only, it should not be considered financial advice.You can read the full disclaimer here.