Tech Leaders Beat Tech Followers

 |  Includes: BKS, ISRG, KODK, MAKO, S
by: Dana Blankenhorn

One of the biggest mistakes investors make is to see a success, see a cheaper alternative, and then buy the cheaper alternative.

Does Apple (NASDAQ:AAPL) look overpriced for a mobile device company? Buy Microsoft (NASDAQ:MSFT) -- they make mobile devices. Google (NASDAQ:GOOG) looks too pricey as a search engine? Try Yahoo (NASDAQ:YHOO) . Can't afford McDonald's (NYSE:MCD)? How about some YUM?

This is the difference between investing and trading. You can make a profitable trade on almost any issue. An investor looks for market leadership and stays with it, even at the risk of paying a higher multiple: Coke (NYSE:KO), not Pepsi (NYSE:PEP), WalMart (NYSE:WMT), not Target (NYSE:TGT).

You switch horses only on clear evidence that leadership has changed. It doesn't happen often. But you can usually feel it when you shop. When a WalMart passes a Sears, or a Google passes a Yahoo, you can see it in your daily dealings, you can research it, you will see it in the prices paid for the stocks, and you can move at your leisure.

Here at Seeking Alpha I got just such an inquiry from an investor this week. The investor liked Intuitive Surgical (NASDAQ:ISRG) but said it's pretty pricey. How about Mako Surgical (NASDAQ:MAKO)?

MAKO competes with ISGI in robotic surgery devices. It's not yet profitable but is trying to build a moat around sales with patents. The implication is they can keep ISGI out of other areas of surgery, like orthopedics, with these patents.

This is a trick that almost never works. It's true that for every Intel (NASDAQ:INTC) there's an AMD. But over the long run the leader will always make the better investment, unless the follower out-innovates it early in the game (as Google did with Yahoo).

There's a reason why premium stocks carry premium prices. There's a difference between followers and leaders. If you want to succeed go with the leader.

This last week offers some great examples of secondary companies falling by the wayside:

Yes, you could argue that the Nook is equivalent to Amazon's Kindle, that the two had similar business models, and thus that the Nook could become a solid number two in the market. But this did not mean BKS was ready to play the technology game with the big boys.

Yes, you could argue that AT&T (NYSE:T) and Verizon (NYSE:VZ) have captive customers, that both claim a shortage of wireless bandwidth, and thus that Sprint's deals to get more couldn't lose. But it's the captive customers, not the bandwidth, that is the issue with the telcos. If you don't have the former, don't worry about the latter.

Yes, there is a big market in patents, and holding up new technologies by demanding licenses on older ones. But that doesn't mean a failing company like Kodak knows either how to play that game or capitalize it.

Real estate is about location, location and location. Stocks are about management, management and management.

There's a reason bad real estate is cheap and a reason bad managements are, too.

Take the lesson and don't be fooled. Stick with the leaders.

Disclosure: I am long GOOG.