The UX Fund: Investing $50,000 in 10 companies, 10 years later
In 2006, the phones in our pockets were used primarily to take a phone call or send the occasional text message. The Web had pushed beyond a basic information system and figured out how to be useful. Google had just released Maps and Spreadsheets. MySpace had more users than Facebook. Digg was the social news site. Blackberry was at the top of their game and started selling phones to more than just business users. The first tweet was sent on twttr. Google had recently purchased YouTube. This was an era in which design had become more than an afterthought. Huge products and services were being created and beginning to really leverage what we used to call, the digital channel. And, despite what some of these sites and services looked like back then, it was clear that companies started to take design pretty seriously.
Ten years ago, while at Teehan+Lax, we had a hypothesis: Companies that focus on delivering great user experiences will see it reflected in their stock price.
Over the course of a year, we set out in a less than scientific process to test this hypothesis. We did so by selecting 10 companies we thought were doing a good job delivering excellent experiences. They needed to demonstrate care in the design of their products. They needed to have a history of innovation. They needed an inspired loyalty in their customer base, and the majority of their customers needed to walk away positively from their experiences.
Once we identified these 10 companies, we would invest $5,000 in each of them for a total investment of $50,000. We would not rebalance the portfolio for an entire year— regardless of performance, news, or a decline in a company’s ability to meet our ‘requirements’.
We would track performance against major indices like S&P, Dow, Nasdaq 100, 500 and compare the results at the end of the year.
We called this the UX Fund.
The companies that compose the portfolio of the UX Fund were:
• Progressive Insurance
• RIM (Blackberry)
• Electronic Arts
You may be scratching your head at some of the picks like Progressive Insurance or JetBlue. The truth is, every single one of these companies were hitting our criteria at the time (you can read more about this on the original blog post).
On November 1, 2006 we bought filled the orders of each stock and waited a full year. If it wasn’t for our “no sell” rule, we would have certainly made changes that year, but we didn’t—we just waited.
A year later and our initial $50,000 investment had grown to nearly $70,000. Per the original plan, we sold all of the holdings after our fund matured. The indices tell us this one year period was generally strong across the board, but the UX Fund outperformed it by a good margin anyway. We looked at the results at our less than scientific test and saw it as plausible. We thought it safe to say some of those companies had strong years — at least in part — by continuing to value design. They crafted well design products and services that solve real problems, for real people.
UX Fund vs. Indices (1 Year Results)
UX Fund: 39.3%
The Nasdaq: 29.1%
Nasdaq 100: 28.7%
S&P 500: 10.3%
The 10 year anniversary of the inception of the UX Fund was this month. I took some time and began to look back in a little more detail. A lot has happened in the last decade in the design industry.
It was FASCINATING for me to look back at this. I told a friend as I was writing it: “Holy shit, this was a golden year for design. Apple’s iPhone, Google Maps, Docs, Gmail… streaming fucking Netflix… they all came out then!!!”
These are still some of the most influential and successful products and services of our generation.
The highlights of the holdings below show where these companies were that year, how we felt about them at the time, and how that investment would have played out had we really played the long game and kept the fund for a decade.
In 2006, Netflix was still heavily focused on the DVD business. They found themselves in a price war with Blockbuster. It appeared as if they’d chosen to position themselves as a commodity and just lower their prices. It translated to a pretty poor year for them in the markets. In my look back I found something we glanced over that turned out to be a watershed moment for the company. In January of 2007, Netflix announced that they’d be offering a streaming service to subscribers. We barely mentioned this in our recap. At 1,000 films, the streaming launch library was small, and it meant you didn’t have the movie locally. in 2007, having a local, offline digital copy of movies was more of the norm. This just seemed like a half-assed response to Apple and Amazon — two companies that had made much bigger strides in downloadable movies and the markets felt the same.
Another interesting highlight was the Netflix Prize. They offered a $1,000,000 prize to the first developer of a recommendation algorithm that could beat its existing algorithm.
So in 2006/07, Netflix seemed paralyzed. It felt as if they didn’t have much of a response to downloadable movies—but that clearly wasn’t the case. They were taking it seriously, it was just really difficult to see. So much so for us that when we wrote the wrap-up post, we stated that Netflix was one of the stocks we said we would have sold if we allowed ourselves to rebalance the portfolio. While that may have made sense over a one year hold, this would have been the biggest regret of the bunch over a decade. That $5,000 investment in 2006 would now be worth over $150,000.
NFLX Profit (Loss)
Original Investment: $5,000
1 Year: -4.8% | ($239)
10 Year: 3064.7% | $152,365
2) RIM (Blackberry)
This is the inverse of the Netflix story. Blackberry, or RIM as it was referred to at the time, was our big winner in ’06-’07. It more than doubled in value over that year. A decade later, it’s lost nearly all of its value.
In the early-to-mid-2000s, RIM dominated the corporate world. That year, they had started to release a few consumer focused handsets like the Blackberry Pearl. The Pearl had a unique modified QWERTY keyboard layout on a 4-row, 5-column keypad, with a proprietary predictive input algorithm called SureType. I switched to it from my Palm Treo and tried convincing myself it was good for a few months (it wasn’t). Thankfully, the iPhone came out (more on that later).
Also that year, RIM announced they’d be bringing their product to China and were coming to the market with a solution aimed at small to medium sized businesses. Despite Apple’s news of the iPhone, RIM continued to be a market leader in their category. The next decade would prove just how important the consumer market would be — and RIM just chose never to focus there.
BBRY Profit (Loss)
Original Investment: $5,000
1 Year: 208% | $10,387
10 Year: -93.9% | -$4,697
3) Jet Blue
This was our biggest one year loss. This may seem like a strange stock for the portfolio, but if you were traveling back then, this company was ahead of the times.
We were doing some product design work for various airlines at the time. As a result, we became pretty familiar with the state of the industry. Jet Blue had rethought the so much of the experience of air travel, including their website, which was best in class. That said, their performance that year was atrocious thanks to things like Valentine’s Day 2007. Over a period of 2 days they canceled nearly 250 flights. Some of these flights were on the runway for nearly 8 hours. The weather was a factor, but it wasn’t the real problem. JetBlue got by in the past with sub-standard communication systems, limited staff and experience. When a crisis of this magnitude arose they just didn’t have the systems, people or experience to properly deal with it — and though they’re actually up 39% in the long run, they definitely paid the price over that year.
JBLU Profit (Loss)
Original Investment: $5,000
1 Year: -29.4% | ($1,476)
10 Year: 39.1% | $1,964
Perhaps an obvious choice in retrospect, but Google wasn’t top of mind when you thought about companies that valued design—they valued engineering. However, when you point great engineers at huge, real problems what comes out the other end are some great experiences—even if the design of the pixels wasn’t perfect.
That year, Google introduced new search features, a new homepage, and continued to develop out more applications launching them in their Labs section. Labs created some of the best Web applications of the time, including Gmail, which was fully available to the public in 2007. Google Maps which launch in 2006 and Google Docs. A decade later, these applications are still staples in many people’s lives.
Google also made their share of purchases that year, including DoubleClick, Feedburner and of course, YouTube.
GOOG Profit (Loss)
Original Investment: $5,000
1 Year: 47% | $2,248
10 Year: 228.3% | $10,912
The poster child of a company that values design. An easy pick. The only interesting story here, aside from how well this stock did (and has done since), is the fact that the iPhone came out during this time. I’m going to quote my wrap-up of owning Apple stock from Nov. ’06 — Nov ’07:
Perhaps this stock was an obvious choice. Apple has always been at the forefront of creating great experiences that bridge hardware and software. During our hold, Apple released new iPods, iMacs and the iPhone. They redesigned their Web site as well as their dotmac services. Recently, they launched a new OS (Leopard). Leopard launched late due to Apple pulling QA resources onto the iPhone. Early usage of Leopard has revealed quite a few bugs and oddities that need to be rectified, likely as a result of the on-again, off-again QA of it. Apple will need to be careful in the coming year not to neglect it’s core offering — the OS. — Me, in 2007.
Reading this made me remember that we didn’t really know just how transformational the iPhone would be. I only mention its release after iPods and iMacs, and I talk about Leopard bugs being a result of Apple putting all hands on deck for iPhone.
AAPL Profit (Loss)
Original Investment: $5,000
1 Year: 131.8% | $6,608
10 Year: 882.9% | $44,263
The UX Fund set out to test a hypothesis. A hypothesis that believes that companies that put a focus on great user experiences will see it reflected positively in their stock price. Given how unscientific this was, it’s hard to say that this was proven or not. Perhaps the ones that found success did so because they had a number of things going for them like 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 amongst the losses, or, a million other reasons, including focusing on consistently creating great user experiences for their customers.
What I realized upon writing this is that we didn’t recognize some of the good design over the course of that year. It took much longer to understand just how good some of that design really was. From the outside, it’s sometimes difficult to identify good design when it’s new.
I think most people know and accept that design isn’t just about what something looks like. Design is about choosing the right problems to solve and how it solves them. Netflix was a bit of an ugly duck back in 2006, but building out an online library of movies to stream was definitely good design. A touchscreen phone seemed beautiful and cool and I knew lots of people would buy them. I also knew equally as many at the time who wouldn’t because it didn’t have a physical keyboard. It turns out soft keyboards, the internet in your pocket on a big screen, apps and more, was good design that solved real problems.
Things played out pretty well for the UX Fund over the last decade. To be clear, we don’t still hold any assets through this portfolio. We sold these holdings after the first year. As good as the gains are, I have no regrets for not holding on. We put that money to good use at the time to help build our business.
Year 1: Gain $19533.48
Year 10: Gain $250,044.52 (unrealized)
Year 1: 6 of 10 stocks gained
Year 10: 9 of 10 stocks gained
Year 1: NASDAQ 29.1%, UX Fund 39.3%
Year 10: NASDAQ 93.2%, UX Fund 450.1%
UX Fund Portfolio of holdings: 10 Year Results
Geoff is Director of Product Design at Facebook. He also cofounded Teehan+Lax in 2002. If you like articles like this — or if you want to find track with the next iteration of the UX Fund — you can follow him on Twitter.