Great waves of creative destruction are set to transform business, creating new superstar companies, laying waste to many traditional investor favourites. Now is the time to re-think your investing strategy.
Now is the time to re-think your investing strategy
I was partly moved to write this article by a video I saw explaining the ideas behind ARK Invest’s Cathy Wood’s approach to investing. But the views expressed here just happen to chime with my own. You may know, back in 2014 I co-wrote a book about disruptive technology and I wanted to dust off the predictions made at the time because they are extremely similar to the ones outlined in the video produced six years later.
The challenge with predictions about how technology will affect the world mainly relates to timing. Bill Gates famously said that we overestimate how quickly a new technology will emerge but underestimate its eventual impact. But investing is a long-term game. I would say that investors need a twenty-year plus time horizon. I am not sure exactly when the changes I refer to will occur, but I am sure they will have a massive impact within the time-frame investors should be considering.
To look forward we first need to look back. ARK Invest believes, as do I, that the latter years of the 19th Century/early20th saw several innovations that pretty much defined how the economy operated for the next century. ARK Invest highlights electricity, the telephone and automobile.
I agree — although I might add a few more things to that list including flight. But the point is that these previous innovations determined almost everything. The western economy boomed during the 25 years or so after World War II as we finally learned how to make full use of these past innovations and it slowed from the mid-1970s onwards as we had pretty much picked all the low hanging fruit created by these innovations.
The 1980s/1990s saw the computer revolution, which was important but not as big a deal as the late 19th century innovations. Then we had the internet and the tech bubble — it is the legacy from that which is creating so much potential.
ARK Invest says that AI, genome sequencing, energy storage, robotics and blockchain technology will advance and converge this decade, creating the next great period of change, transforming the shape of the 21st century. Of course, there are other important technologies such as drones, quantum computers, DNA editing, Immunotherapy, 3D printing, new super materials and nanotechnology.
The convergence of all or some of these technologies will change the world.
And the change won’t occur gradually; it will see sudden revolutionary developments as different technologies advance at an exponential rate, each passing a kind of tipping point and becoming complementary, creating convergence.
The iPhone serves as a good metaphor — it was made possible by Moore’s Law, commoditisation of components and faster wireless internet speeds. In parallel and largely independently of each other, these three drivers all passed a kind of tipping point at about the same time, and touchscreen phones were transformed from clunky, unwieldy beasts to products that helped create the world’s first trillion-dollar companies, and in a very short time frame.
But the convergence between the technologies I refer to above will be far more radical.
What are the consequences? Let me highlight one prediction. ARK Invest predicts that e-commerce will quadruple in size, and by 2025, it will account for 60 per cent of retail sales; thanks to drones and automation.
Imagine the implications. Imagine what such a radical change to retail will mean for real estate. Add to the mix the shift towards remote working. Real estate assets will become like albatrosses around the neck of companies with large property assets. And if they seek to sell those assets, they will exacerbate the speed with which these assets lose value.
Among the victims will be banks with their branch networks.
Consider how new challenger banks, operating purely online, benefiting from the lower barriers to entry created by the internet, are breathing down the necks of large banks. These days I use Monzo Bank — its service is superb. I especially like how it will pay you money in the banking system from 4pm the day before it’s due in your account.
But add to the mix blockchain, this could have a massive disruptive impact on the banks.
So, that’s retail, property and banks. People look at horror at the valuation of Tesla; maybe they should instead be looking at traditional companies, with modest P/E ratios, with a track record going back decades, and ask: “How can such companies survive the disruptive shock coming their way?”
Add to the mix oil companies — I don’t see how they can survive long-term without totally changing their business model. If banks and retailers sit on stranded assets called property, then oil companies have a stranded asset called oil. Those who deny that the oil industry will be reduced as I describe, ignore the imperative created by climate change.
But the biggest shock of the lot might come with the emergence of fully autonomous cars. With autonomous electric vehicles: the upfront cost of buying one will be high, the running cost extremely low. By removing the driver from the equation, the cost of ordering a taxi will plummet. With autonomous cars, the model will be akin to the cloud model today: most of us won’t have a car — unless we live in a rural location — we will order a car when we need it. Our transport needs will be met for much less cost. This will have a devastating impact on the traditional car industry but be a boon to companies that help facilitate the car-sharing model.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.