Transformation, Valuation, Employment, and Deflation
Disruption to some of the world’s most important industries, deflationary pressure caused by scaling lower-cost businesses, and sustained low interest rates challenge traditional valuation models. Technological platforms, from blockchain-based businesses to energy storage to DNA sequencing, enable unprecedented disruption to business and economic models.
Interest rates will remain low, equity values will remain high, innovation will drive deflationary pressure, and volatility will be intense and frequent. A new approach is required to understand dynamic global competition and sustainable value.
Failures are essential for success. The NASA flight director, Gene Kranz, who is famous for the Apollo 13 quote, “Failure is not an option” has been misunderstood. Mr. Kranz did not mean “don’t fail.” He meant was that there will be a solution, think boldly and courageously because, while the solution may not be obvious to you now, you will find it eventually.
Accepting failures is not accepting failure.
Failures – trial and error, unforeseen roadblocks, creative thinking, visions, and revisions that a minute will reverse – lead to insight, innovation, creativity, and unforeseen breakthroughs. That’s success.
Investors have been swept up in the notion of “philanthropic capitalism” and have targeted life-sciences as an avenue that can fulfill this benefit to society. While laudable in concept, this is non-scientific surrealism. “Hoped-for” is not a reliable business model, and most of the unrealistic goals would not be sustainable even if achieved. Real science and innovation are more impactful and substantial and make life sciences even more.
Technology is facing a substantial crossroads as policy changes with global resonance, such as China’s new crackdown on the country’s big tech companies (such as Ant Financial and Didi Global), the rising resistance to social media behemoths like Facebook, and the need for governments, whether in the United States, Western Europe, or China, to manage and control technological development. Regardless of any good intentions, this will add friction, inefficiency, and underperformance to the most dynamic global industry. The best intentions usually bring disastrous consequences. China cannot escape the law of unintended consequences. Trying to “manage” innovation and creativity takes away the often unplanned and serendipitous breakthroughs that make many significant advancements possible in the first place. From an economic perspective, capital is not going to invest in an uncertain environment where prosperity is managed and, despite great risk where most ventures will fail, the truly successful ones which make up for the losses and encourage capital to keep investing, will be mitigated. The vanguard of capital flight from China is beginning, and it will not ease if this policy and attitude are not revised. This attempt at “fairness and more equal distribution” will do nothing more than keep capital away and stifle any attempt at creativity, technical innovation, and economic advancement. The intention of this policy will yield the opposite outcome as a consequence. The signal means substance. Substance means innovation, creativity, and competitive dynamics that create the most effective innovations, the best solutions, and the most sustainable companies. Central planning, bureaucratic industrial policy, government-led economic management, and dictatorial focus have always failed, and always will. The US should not fall into this trap, regardless of how appealing it may be.
When Everything is Going Great, It Probably Isn’t.
Things can only get better from here… said the turkey the day before Thanksgiving. It’s challenging to know when it’s too late because things go badly gradually, then suddenly.
It might be time to start worrying about tech-stock valuations. Usually, all it takes is a few overly ebullient stock analysts to set off an alarm. When unreasonableness takes over (remember all those analysts’ reports from March 2000? The NASDAQ could only go up and all those internet funds were going to double again in 2001?). In March 2000, the bellwether for this nonsense was Henry Blodget’s recommendation of Amazon with a target price of $400.00 by March 2001 (at the time Amazon was trading for about $60.00 a share). Instead of being $400.00 in March 2001, Amazon’s price was $5.97 per share.
Long Term Value Means Long Term
Of course, Amazon has created an amazing business model and is fundamentally rewriting technology services and customer logistics. Trading at almost 100 times earnings the market believes there is much more growth and profitability to come. Really? Regardless of your perspective about that, Amazon is an example of investments that are either “don’t bother it’s ridiculous” or “never sell it’s ridiculous.”
The market may stay permanently irrational about companies like Amazon, or Amazon may catch up to the market’s irrationality. What should an investor do? The answer is simple – don’t play. By that I mean you either buy the stock and ride the tiger (which means you can never get off – or sell) or stay out of the jungle completely – don’t ever buy. Half measures rarely have good outcomes.
Amazon is exemplary. This tiger has rallied substantially since those woeful days in March 2001 to close above $3,200 per share in February 2021. So, even if you listened to the absurdity belched out in March 2000, and on paper, had substantial losses from your Amazon investment for several years, if you held on, you are brilliant and rich (more like lucky; but it’s smarter to be lucky than lucky to be smart). Don’t listen to the analysts and don’t get off.
Look at the facts not the opinion about the facts. Anyone holding themselves out as an expert has, a very deep but narrow knowledge base that is rarely universally applicable. Fundamentally, listening to opinions rarely give useful insight. Often, it assumes looking backward but does not apply to the current situation. Global commerce, trade (and trade wars) tariffs, flexible manufacturing, and global markets, along with technological innovation and automation create significant pressures against inflation, regardless of employment levels. These are the set of facts to be considered, not an assumed economic model where few people understand the actual inputs from 50 years ago.Another example looks at revenue projections based on historical business models. But what happens when those business models are changing? We discussed the example of the metamorphosis from Blockbuster to Netflix where a fundamental change in the business model made revenue projections from the historical model meaningless. Then, Netflix had to change their business model again to one of the original production and international expansion – once again obviating existing models for revenue. Facts are what happened. Specific and verifiable. Knowledge is the appropriate combination of facts. Knowledge comes from understanding the facts that matter. Wisdom is the insight that leads to prediction. At its core, any investment strategy predicts the future. To predict the future effectively one needs the wisdom to grasp what will happen. Of course, this cannot be known, and there are many random events that can affect the future (see Anti-fragile and Fooled by Randomness by Naseem Taleb), and uncertainty should always be factored into any investment decisions or predictions.
“Assume no knowledge” (Socrates) No successful company can create or sustain its competitive strength without constantly examining its First Principles. It means defining a problem effectively, understanding the actions needed, and then implementing those plans. This requires a unique combination of perspective, talent, drive, and organizational flexibility. It is rare, but when discovered, it is…
Technological innovation ignites economic growth feeding further innovation. But, has our relentless progress irrevocably tipped the balance from a virtuous circle of innovation and growth to a downward spiral of disaster and decline?
