If innovation leads to success, shouldn't the stock market reflect that?

I don't think any long-term conclusions should be taken from the data he uses. The 2008 data basically captures the market downturn, and the 2009 data captures the recent bull market. It's not really representative of larger trends.

it's possible that the market has already priced in their innovativeness. if this is the case, then the subsequent stock dips indicate that their innovations did not pan out.

I think the explanation here is that sadly, innovation does not always lead to success for its innovators, at least not immediately. Several of the underperforming companies are doing very innovative things, but their stock price could be lagging because of internal scandal, bad timing/location, bad investments, or just the state of the economy in general (smaller luxury market, etc.). The first to market always has a significant advantage, but as history has shown (Netscape, Creative Nomad Jukebox), that advantage is not everything.

Affymetrix, for example (AFFX, -43% vs S&P) is working on making different medical treatments for different people based on genetic variations (metabolization rate, etc.). However, much of their work is still experimental, and they reported a significant negative net profit in Q4 2008 (http://www.google.com/finance?q=NASDAQ:AFFX&fstype=ii). They were and are a speculative investment, and their stock price reflects the market's skepticism that they will capitalize on their innovation.

That said, it almost certainly is innovation, and it will inform and inspire future scientists who may eventually make it profitable.

Additionally, many of these companies target what the UN calls "developing countries" and the stock market calls "emerging markets". These are long term investments, based on worldwide trends of previously poorer countries (BRIC) "emerging" into Western standards of living and, consequentially, becoming consumers of our shit. While these may be profitable eventually, their "innovation" may be just learning the needs of a new, poorer but still technologically literate market.

Also, some of these are just poor calls on FC's part. Nokia 2 years in a row?!? Come on.

The problem is defining what we mean by innovation. In the strictest sense innovation is "the bringing of the new" An established company however is based on making money from what they do already. Then they talk about innovation because it sounds good. When we try and define an innovative established company we are not really making sense. What we really mean is "being clever at what they do already". The other issue is that share price is more determined by institutional investors rather than market performance. The whole concept is like judging the performance of a car based on the colour of its' engine.

Have a look here - "The Myth of GDP and Stock Market Returns": http://www.virtus.com/vsitemanager/Upload/Docs/6141_GDPwhite... (PDF).

A few highlights: - "GDP is analogous to sales; stock returns to corporate profits." - "The stock market does not reflect the full economy." - "A company’s profits may be earned outside the country in which it is listed."