NEW YORK (TheStreet) -- On my way home from work recently my progress was impinged by a group of protesters headed up 4th Avenue in downtown Seattle to the headquarters of the Gates Foundation. Bill and Melinda Gates are spending millions trying to figure out how to make the U.S. education system more efficient and successful.
Some of their recommendations are thought to damage efforts by the most powerful teachers' unions to protect the interests of teachers. The Gates Foundation wants to bring efficiency and seems to understand that it needs to be agnostic in their approach.
At Smead Capital Management, we believe investors in common stocks are like this group of teachers protesting the Gates Foundation. Just as some teachers balk at the Gates Foundation's recommendations, many investors balk at the brutally efficient and agnostic approach the Internet fosters in everything from retailing, technology, communication and labor.
We contend that investors' should remove their emotion when thinking of the Internet.
The Internet allows for new and great inventions every year that drive down prices for consumers. In effect, it is massively deflationary. The trick for business owners is being in toll-bridge businesses which require low levels of ongoing innovation, but can defend or (to our glee) raise their prices. Therefore, these toll-bridge business owners don't need to march on the Gates Foundation headquarters.
Amazon (AMZN - Get Report), eBay (EBAY) and others have brought efficiency to online commerce and a great deal of competition to brick and mortar retailing. As the 86 million echo-boomers age during the next 15 years, we see them driving online commerce to 15% of total commerce, up from the current 6.2% level.
PayPal appears to be a big winner in an environment where secure, online payments could flourish. It will become more and more important for retailers to compete against online commerce by being effective online themselves and by providing significant value to what we call an addicted-customer base. We own eBay, Nordstrom (JWN) and Cabela's (CAB) under this premise. If you don't have a cult of fans, you don't have a toll bridge. Competing on price alone could kill many retail businesses -- just ask former employees of companies like Sears and K-Mart.