“What these [Wu-Tang clan] guys have done — without taking a single business school course — is to go right to the head of the class in terms of strategy development.” James Cash, Harvard Business School (New York Times, 1996)
Rza (Robert Fitzgerald Diggs) grew up in Brooklyn and Staten Island. He learned about business by actually being in business on the street from an early age. As Warren Buffett likes to say: “Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.” Rza hustled and learned early in life how to operate and negotiate as an entrepreneur. Buffett says the earlier in life you are in business the better it is for your business skills since you can learn…
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Slow GDP Growth + Technology Advances = Big Stock Movement
In 1958, the average life span of a company in the S&P 500 was 61 years. Today, the lifespan has dropped to about 20 years according to a recent article inFortune. Technology is collapsing barriers to entry. Alibaba is the world’s most valuable retailer but holds no inventory. Airbnb is the world’s largest provider of accommodations but owns no real-estate. Uber is the world’s largest car service but owns no cars.
Industries are changing faster than ever. Predicting the composition of the S&P 500 over the next several years is becoming almost impossible as value is created and destroyed in very short periods of time.
From an investment standpoint, this acceleration has several implications:
- Buying and owning any single stock now carries potentially greater return (if the company is one of the few that is a disruptive innovator and greater risk as many companies are being hurt by rapid change and the expected lifespan of any stock has decreased significantly.
- Buying an index of stocks is a way to gain exposure to the positive aspects of disruptive technology while mitigating some of the stock specific risks that are on the rise as a result of change acceleration. Index rebalancing adds winners and removes losers from the index.
- Having a dynamic, disciplined rules-based system to shift between sectors to capture the fastest and most positive effects of change should show increasing portfolio benefits.
On a broader level, technology acceleration can explain how Gross Domestic Product (GDP) growth can be slow but some stocks can be robust. It explains how many Americans feel they are not enjoying the benefits of an expanding economy while a select few are amassing multi-generational wealth.
The Federal Reserve is projecting 2% GDP growth in 2016. GDP is the market value of all final goods and services produced. Disruptive technology often benefits a few companies at the expense of many. Technological innovation may create significant savings for consumers at the expense of many jobs lost.
According to the Fortune article, when Microsoft bought the Internet phone service Skype in 2013, it earned an extra $2 billion that year while traditional telecom firms lost roughly $37 billion as consumers moved away from paid phone service to free Internet phone service. It is common that as disruptive technology gains acceptance, the firms offering the new technology benefit while the total revenues of the industry fall dramatically.
Internet travel sites like Priceline eventually put roughly decimated the travel agency business. This provides an example of the new math of slow GDP growth (collapsing industry revenues) with major stock advances. Shown below are charts of Priceline’s (PCLN) stock price from 2003 through today and world airline passenger traffic for the same time period. Priceline’s 13,212% advance highlights the stock benefits to being a disruptive force in a winner-take-all world of technology change.
Accelerating technology advances and their application to bringing efficiencies to industries places downward pressure on GDP growth and makes stock investing potentially more rewarding but significantly more challenging. As Heraclitus of Ephesus said sometime around 500 BC, “the only thing that is constant is change.”