“If it wasn’t for that machine, 12 men with shovels could be doing that job,” gripes one of the men.
The other replies, “If it wasn’t for your 12 shovels, 200 men with teaspoons could be doing that job.”
The ad put a simple spin on a powerful point …
Technology continues to advance. And as it does, it destroys old ways of doing things.
In one sense, this is incredibly exciting. What we’re going to witness in the coming decades is going to be nothing short of astonishing …
For example, it’s reported that at the current pace of progress, in just 10 years’ time we will be able to create perfect, virtual worlds with feedback directly into the brain. Companies developing neural interfaces (such as Neuralink) will be able to safely feed simulations from a computer to the brain, primarily its pleasure centers, bypassing the body. This will enable complete immersion into, say, a video game, or simply some alternative reality constructed by the user.
On the other hand, technological advancements like this will bring destruction.
Let’s say you work for a video-game company that fails to adapt to this “total immersion” paradigm. What will happen? Well, in all likelihood, your company will go bankrupt and you’ll be out of a job.
If you have any doubts about this, consider Eastman Kodak. Younger readers may not have even heard of Kodak, but in the days of printed photographs, it was the top dog.
Unfortunately, Kodak went from being one of the world’s most powerful, respected companies to bankruptcy because it failed to adapt to advancements in digital camera technology (which, ironically, were developed in 1975 by one of Kodak’s very own employees).
The reality is that we’re going to see an avalanche of “Kodaks” in the next several decades thanks to The Law of Accelerating Returns. Of course, there will also be huge winners as certain companies pioneer groundbreaking technologies that become commonplace in our everyday lives.
For investors who are ready, this is going to present massive investment opportunities. For those who don’t see this coming and aren’t prepared, perhaps a portfolio of slowly dying dinosaurs.
Let’s make sure we’re ready.
***Everything is about to change thanks to The Law of Accelerating Returns
Regular Digest readers know Matt McCall as a thematic investor. This means Matt specializes in identifying major trends that are re-shaping our world, and by extension, the investment markets. He finds the investing implications of these trends to ride them higher for years.
Now, what you may not know is that Matt’s newsletter, Early Stage Investor, is built on a core concept that’s at the heart of tech-based thematic investing: The exponential progress of technology is going to demolish old industries, while simultaneously creating new ones.
Here’s how Matt describes this to his Early Stage Investor subscribers:
Think of the extraordinary change someone born in 1900 could have seen over a long life.
As a child, they would see horses in city streets … and grow up to see those streets full of cars. They would see the invention of the radio … the airplane … the fax machine … air conditioning … personal computers … and the list of big changes goes on.
I believe those of us who live the next 30 years will see a similar set of changes. We’ll see the world change more rapidly than any other group of people in history …
And it’s all thanks to The Law of Accelerating Returns.
If you’re on the right side of this law, you’re virtually guaranteed to make a fortune.
If you’re on the wrong side of this law, you could lose your job and the value of your investment portfolio could crater.
Matt goes on to describe this law, explaining how it’s rooted in exponential progress — basically, the idea that each new technological step advances on a multiplicative basis, rather than an additive basis.
For example, the old way of growth was 1 + 1 = 2 … the next advancement comes and we add another “+1” to get “3.” The next step comes and we add another “+1” to get “4.”
But thanks to exponential progress and the Law of Accelerating Returns, this has all changed — now we multiply the advancements.
So, take your first step … and double it. We’re at “2.” Now, take that “2” and double it again — we’re at “4.” Double it again, and we’re suddenly at “8.” Then “16.”
Back to Matt:
Knowing the difference between linear growth and exponential growth instantly sets you apart from your fellow investors and give you a huge advantage over them. It can literally make you millions of dollars over the coming years.
***But the Law of Accelerating Returns presents very real dangers for investors as well
We’re already seeing signs of the impact of The Law of Accelerating Returns on the S&P 500.
To make sure we’re all on the same page, the S&P 500 is a stock index — think, a collection of individual stocks. But what many people don’t realize is these individual stocks change rather frequently. You see, to be a part of the S&P 500, a company must have a market cap of at least $5.3 billion.
As companies do well or poorly, or as they’re acquired by larger companies, it means any individual company can fall off the S&P, or be added to it.
For example, look at the graphic below highlighting many household-names that were removed from the S&P between 2013-2017 (on the left side). You’ll also see the stocks that were added (on the right side).
Source: Innosight
Now, what’s interesting is a research group called Innosight recently found that the average length of time a company spends on the S&P is shrinking.
In 1964, the typical company on the S&P lived on the index for an average of 33 years. By 2016, that number had shrunk to just 24 years. And by 2027, the forecast is it will fall to just 12 years.
Why is this happening?
Creative destruction combined with corporate managers failing to adapt.
From Innosight:
Viewed as a larger picture, S&P 500 turnover serves as a barometer for marketplace change. Shrinking lifespans of companies on the list are in part driven by a complex combination of technology shifts and economic shocks, some of which are beyond the control of corporate leaders. But frequently, companies miss opportunities to adapt or take advantage of these changes through economic innovation …
A gale force warning to leaders: at the current churn rate, about half of S&P 500 companies will be replaced over the next ten years.
Consider the “changes on the leaderboard” we’ve seen in just the last two decades courtesy of tech advancements. In 2000, here were the top four largest companies on the S&P 500.
And what were the top four as of last year?
Exxon had fallen to 11. And General Electric, Pfizer, and Citigroup had all fallen out of the top 12.
***So, what should an investor do with this information?
It begins with a simple awareness of the changing nature of the markets.
We’ve all heard stories about the little ‘ole grandmother who invests in, say, IBM, for 40 years, reinvesting dividends over time. As the decades pile up, a once-humble initial investment as grown into millions of dollars.
While this type of buy-and-hold investing will still exist, it will do so on a smaller scale. And any buy-and-hold investors in tech should be especially careful.
Think about why …
Given the rate of exponential progress we’re now seeing — which is only going to accelerate in the coming years — how many companies will be able to stay at the forefront of cutting-edge innovations over multiple decades? Think about how nimble a company will have to be to consistently incorporate new technologies into a business model and sales process.
Google, Amazon, Facebook, and Apple sit upon the carcasses of Napster, Blackberry, AOL, Palm Pilot, Netscape, MySpace, and AltaVista, to name just a few.
So, the first step is a defensive one. Looking at your portfolio, which companies appear nimble enough to adapt to coming technological and cultural changes? Which might be remnants of the past, clinging to old business models and passed-by technologies?
The second step is an offensive one. Does your portfolio have some chips placed on tomorrow’s tech leaders? Not just the obvious FANGS, but smaller companies with disruptive technologies that will turn into the FANGS of the coming decades.
When it comes to extreme wealth creation, few endeavors can compare to being an owner of a small company that grows large.
… an early investor in Microsoft could have made over 9,000% during the 1990s. That type of gain turns every $5,000 invested into $450,000.
It only takes one of these big hits to make a huge amount of money in early-stage companies.
As we wrap up, technology is changing … the world is changing … investing is changing. Whether you’re ready for it or not, it’s going to affect your portfolio. Start taking the time to prepare today.
