David Sarnoff

David Sarnoff was the visionary leader of the Radio Corporation of America (RCA) for nearly half a century, pioneering the development of both radio and television in the United States. While not an investor himself, his story is a cornerstone of investment folklore, particularly for followers of value investing. Sarnoff's journey with RCA serves as a powerful cautionary tale about the perils of market euphoria and the transient nature of corporate greatness. RCA was once a dominant, seemingly invincible technology giant—a “must-own” stock of its era. Investors, mesmerized by Sarnoff's vision and the company's growth, bid its price up to stratospheric levels. However, the company eventually faltered due to fierce competition and strategic missteps. Its subsequent collapse provides a timeless lesson: no company, regardless of its innovative prowess or dominant market position, is worth an infinite price. Sarnoff's legacy reminds every investor of Benjamin Graham's crucial distinction between a great business and a great investment.

David Sarnoff (1891-1971) was a force of nature, an immigrant who rose to become one of the 20th century's most influential figures in media and technology. His career is the stuff of legend. As a young wireless operator, he famously (though perhaps apocryphally) relayed the first news of the Titanic disaster. His true genius, however, lay in his vision. In a 1916 memo, he outlined his idea for a “radio music box” that would bring “concerts, lectures, music, recitals” into every home—a breathtakingly accurate prediction of commercial radio. As the head of RCA, which was spun off from General Electric, Sarnoff relentlessly drove the company to the forefront of innovation. He didn't just sell radios; he created the broadcasting network (NBC) that gave people a reason to buy them. He then repeated this playbook with television, pouring immense resources into its development and popularization, culminating in RCA's introduction of the first compatible color television system. For decades, RCA was synonymous with the future, and Sarnoff was its chief architect.

For investors, the story of David Sarnoff is less about technological triumph and more about a timeless market lesson that could be called “Sarnoff's Law”: Even the most brilliant visionary cannot justify an infinitely high stock price.

By the 1960s, RCA was a blue-chip behemoth and a celebrated member of the Nifty Fifty—a group of premier growth stocks that Wall Street considered so high-quality that you only had to make one decision: to buy. The price was thought to be irrelevant because their growth seemed unstoppable. Investors, captivated by the story of television's expansion and RCA's dominance, happily paid enormous premiums for the stock. At its peak, RCA's price-to-earnings (P/E) ratio soared above 50, a level that implied decades of flawless, rapid growth. The market believed in Sarnoff's magic and priced the company for perfection.

Perfection, however, rarely lasts. Sarnoff's relentless drive for technological supremacy became a weakness. He poured hundreds of millions into developing the SelectaVision, a complex video-disc player, in a bid to beat the competition. While technologically impressive, it was a commercial disaster, arriving late to a market already being conquered by the more flexible and practical VCR tape format from Japanese rivals like Sony. This costly failure highlighted a deeper problem: RCA's once-impenetrable moat was eroding. Fierce competition in consumer electronics squeezed profits, and the company's management struggled to adapt after Sarnoff's era. The stock, once a darling, came crashing down in the 1970s, wiping out fortunes for those who had bought at the peak. A “one-decision” stock turned into a one-way ticket to devastating losses.

The rise and fall of Sarnoff's RCA is a foundational story for value investors, including Warren Buffett, who have often cited it as an example of what not to do. It beautifully illustrates several core principles.

• A great company is not always a great investment. The most critical factor in your investment return is the price you pay. RCA was a fantastic, world-changing company for many years, but it was a terrible investment for anyone who bought it during the euphoric “Nifty Fifty” craze.
• No moat is permanent. Technological change, competition, and poor capital allocation can breach even the widest of moats. Investors must constantly re-evaluate a company's competitive standing rather than assuming past glory will continue forever.
• Beware of narratives. Compelling stories about visionary leaders and revolutionary technologies can be intoxicating. A value investor's job is to look past the story and coldly analyze the numbers, always insisting on a margin of safety.
• Focus on business economics, not just technology. A brilliant invention is only valuable to shareholders if it can generate sustainable cash flow. Sarnoff's focus on winning the technology race, at any cost, ultimately proved detrimental to the business's long-term financial health.