Why Does AI Matter?

With so much hype around AI, it is easy to dismiss it as just another technology fad. It’s not always clear how these advancements will really impact our daily lives. So, it is also easy to underestimate how important AI will be for everyone in society and just how quickly it is advancing. Why all the hype about AI? The bottom line is that it is going to change every aspect of our daily lives from the way business is done to the way we all live. It is going to happen quickly.

There is no better example than to compare the evolution of images. When OpenAI’s Dall-E first came out in 2021 it was able to generally produce a picture from a text description, known as prompts. Fast forward to April 2022 and the release of Dall-E 2 showed a material advancement in the technology’s ability to generate higher quality and more detailed images. It brought about questions of what it means in the future when AI can generate video. Well, in only 18 months since the release of Dall-E 2 and ChatGPT, it’s already being answered.

In February 2024, Open AI released Sora for a limited trial within certain industries. Sora generates videos that are up to a minute long in a matter of seconds based on simple text prompts. Imagine being a business that can now generate your advertisements for TV in a matter of minutes. Now imagine being the advertising agency or film company. One of many industries about to become modern versions of the blacksmith. That is a real-life example of the pace of change.

It’s why Hollywood writers and actors were on strike back in 2023. They know where this is going. Imagine being Pixar spending and generating millions on creating state-of-the-art animation only for AI technology to replace you overnight. Just as anyone can produce content today, in the very near future the type of content will expand to include the ability to create ads, animation, TV series or movies in a matter of minutes.

In the short to medium term, many of these organisations will actually benefit by continuing to do the work they do and thrive as they harness AI internally and produce more content more quickly and more cheaply than ever before. But that is phase 1. Phase 2 is when it really starts to disrupt industries. Their customers start to work out that there are now businesses that provide them with access to create their ads online and suddenly the entire industry moves towards almost zero cost and is then ultimately a software service platform.

Talking to senior leaders in the legal industry and they will tell you they are seeing the impact of AI firsthand in exactly this way. Right now, they can have lawyers deploy AI to complete work in an hour which would take an associate lawyer 2 days. It means lower costs and higher margins – for now. But eventually, it flows through the business model, and it won’t be long before AI-enabled solutions are offering far cheaper but no less effective legal solutions.

This is the same for every type of business where people are doing the work. In the future, it will be AI doing more and more of it. Where it’s physical work, it will be at the intersection of AI, automation and robotics. For example, Amazon’s robot workforce is forecast to surpass its human employee count (currently around 1.6 million) by 2030. There isn’t an industry or a job that will be left untouched by AI. Highly trained professionals such as surgeons, lawyers, or accountants? You will be replaced by AI and robots. Construction and labour? You will also be replaced by AI and robots.

A more futuristic example of AI disrupting an industry is the concept of fully autonomous, AI-driven construction. Imagine a construction site where robots equipped with AI algorithms handle everything from excavation to assembly, with minimal human involvement. These robots would be able to analyse blueprints, navigate the construction site, and use technology to build structures with precision and efficiency. They could work around the clock, speeding up construction timelines and reducing labour costs. We can disagree over the timeline, but I can guarantee that this is coming soon enough.

I’ve heard people doubt that this level of computer-driven autonomy can happen because they can’t comprehend a world with so many jobs disappearing. But that’s the wrong way to think about it. What people will do for work or entertainment will take care of itself. It is a completely separate question and has little to no bearing on the fact that many of these jobs will disappear as this technology takes hold. It might be confronting but it certainly won’t stop the progress.

It is quite possible that AI and automation will result in many of the things that people have previously worked all their lives for will be readily available at an extremely low cost. There is the prospect of abundance as technology can easily produce what is needed for everyone. This means an exponential rise in the standard of living and the potential to eradicate poverty. It will happen in stages, but it is happening already. AI matters because it is going to change the lives of every person in the world in the years ahead.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Is the S&P500 in a Bubble?

The USA has never seen such a large percentage of its share market represented by so few stocks. The booming share prices of the ‘Magnificent 7’ as they are called (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Netflix) has driven the market higher. But their disproportionate gains compared to the rest of the market means they now make up roughly 29% of the S&P500 index. If you are invested in a fund or ETF that replicates the S&P500 Index that’s the ratio your investment has. Basically 30% to 7 big tech companies and 70% to the next 493.

But does that translate into ‘bubble territory’ for the S&P500?

In ordinary times, it would be easy to for investors to assume that it is because at face value, it looks like a bubble given the rapid rise in share prices. However, the real answer is more complex. There are several nuanced layers to the recent surge in these 7 key stocks so it’s more difficult to quantify bubble territory than usual.

I am usually the last person to say ‘this time it’s different’ because inevitably it is not. A healthy dose of scepticism is a good way to stop yourself from getting caught up in the hype. However, at this very moment, it might be different for several reasons.

It is an unprecedented imbalance that has many investors comparing this situation to previous bubbles such as the dom.com boom and bust and more recently the tech crash following the rise and fall of crypto and the metaverse. The biggest difference here is what underpins the rapid rise.

Perhaps most significantly, these companies are at the forefront of capitalising on the early stages of the AI mega trend. This is not a fad; the AI surge is very real, and it is in my view going to be the most significant technological advancement in history.

AI is going to create huge revenue opportunities and importantly massive productivity gains across the world. In fact, it already is for many companies. As long as the revenue and earnings growth continue to meet expectations, you can justify higher share prices. It is even possible that markets are underestimating just how much and how quickly the exponential growth of AI will change everything in the world in the years ahead.

Secondly, these stocks are mainly online platforms with global distribution and scale unlike anything the world has seen. This is not hyperbole. The nature of technological globalisation is one that allows for access to customers more cheaply and quickly than any businesses have ever been able to.

The third aspect driving share prices higher is simply the weight of money being allocated to these stocks. These global behemoths are the types of businesses that are able to survive almost any economic or political conditions. So, a key element of that flow of money is effectively a flight to safety as investors look to protect capital in uncertain times.

In the past investors bought shares in ‘recession proof’ businesses like Coles and Woolworths or their international equivalent because the theory was people still had to eat. In today’s digital world it’s the tech companies that are essential to our everyday lives. The volatile geopolitical environment has influenced investors too. Similarly, rising global tensions creates uncertainty so investors look at ways to invest their funds so that their capital is protected.

Then there is the allocation through the massive passive funds management industry. These funds allocate capital to replicate exposure to the index. While that is generally a good thing, offering easy investment options it is not without its quirks, biases, or pitfalls. The simple weight of money pouring in gives no consideration to valuations. At a time where a sector is disproportionately weighted these index funds simply pour fuel on the valuation fire and make the bubble worse.

All of this is important context to understand when looking at the market. The recent performance of the S&P500 has been skewed by the performance of a handful of companies. For investors who are older or who have less aggressive risk profiles, exposure to the S&P500 is no longer the diversified exposure to 500 industrial giants in the US market. Its composition has changed significantly and as such the risk investors take being invested there. Most investors have unwittingly increased their risk.

So, while we do have exposure to many of the magnificent 7 in our clients’ portfolios because they are great companies, we do not hold them at the same levels as they are represented in the index. When markets are doing well, investors become complacent and forget to manage their exposure to risk. While the recent surge in big tech may not be a bubble just yet, the distortion in the composition of the index makes it more important than ever for investors to be cautious and prudent in their allocation of capital; not only across asset classes but in considering the underlying assets you hold.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

10 Themes for 2024

1. The rise of AI

2. China slowdown

3. Geopolitical tensions  

4. Energy 

5. Falling interest rates 

6. Government bonds 

7. US election

8. Rising unemployment 

9. Government debt

10. Austerity

Many years ago, I remember reading that as you progress through life you first acquire information, then knowledge, and ultimately wisdom. So, it occurred to me at the time, some 25 years ago, that as the internet started to really change the world and usher in the “Information Age”, technology would eventually lead to the “Knowledge Age” and one day hopefully a “Wisdom Age”.  

With the breakthroughs in artificial intelligence in the past two years, I genuinely believe we have now entered this second great phase, the “Knowledge Age”. Advancements in technology continue to grow exponentially with none more exciting and impactful than AI, which is still in its infancy. This year will see AI become more mainstream and integrated into our lives than ever.   

With regard to AI investment, opportunities remain endless as every company in the world rushes to implement the technology into their business in every way they can. This is a multi-decade opportunity just as the internet was before it. This is not just about the mega tech companies, it’s about every company. The changes ahead will be genuinely transformational for the human race.  

Beyond China’s challenges in the property and debt markets, their economy is still coming to grips with western nations reducing their reliance on Chinese supply chains. It is China where I suspect the first economic domino to drop. A more severe economic slowdown or crisis in China is certainly a potential catalyst for triggering a range of other domino effects across the world. The prospect of an ongoing slowdown in China will make conditions especially difficult here in Australia.  

With every new international conflict, the USA becomes more distracted, and their resources, power, allies, and control are diluted. Before those more idealistic and critical of the USA military become too excited about a weakened USA, for all their flaws, the USA, and its military might remain necessary for global stability. Their enemies though, already realise this and are more emboldened than ever knowing that they can get away with more than they usually would. The risk of escalation is high as spot fires of war spring up around the world. The prospect of conflict becoming bigger or entrenched globally is real. There are significant economic impacts here from inflation to global trade.   

Energy remains a high-conviction long-term investment theme despite the prospect of a slower economy. The move to clean energy is slow and expensive while there has been a chronic underinvestment in traditional energy, such as oil and gas, across the world. This dynamic combined with the potential for supply disruption due to geopolitical tensions across the Middle East and Europe may well see a higher oil and gas prices in 2024 and beyond. 

I think this year we will see interest rates stay too high for too long and with that a global recession will see unemployment rise sharply before interest rates are reduced. There remains a chance of the ‘Goldilocks’ scenario unfolding if central banks can orchestrate the perfect balance, but I have just never believed that to be a realistic scenario to use as a base case. Human nature and by extension that of our economy and society more broadly is one of extremes, not balance. It’s why we get booms and busts.  

The opportunity in government bonds is uniquely exciting given it’s the world’s safest and usually most boring asset. After a couple of very poor years where we almost completely avoided this asset class, bonds are back in 2024. You can pick up a 4-5% income yield these days and with the prospect of interest rates starting to fall later in the year, bonds are poised to deliver solid returns in 2024. Bonds could easily achieve a 10%+ total return with very limited downside risk.   

Elections don’t usually move investment markets significantly. However, the US presidential election is set to be different. Perhaps the most polarising figure in the world this century is Donald Trump. I’ve been saying for a while that by the end of 2024 Trump will either be in jail, dead or president of the USA again. I don’t know which, but I will not be surprised by any outcome. If he wins back the presidency, which I think is very possible, the world is in for a shock as he is likely to be far more ruthless and bold this time around. 

The US government debt is now $34 Trillion and growing fast. Expect Government Debt to be an election topic in the US and other countries where debt is at record highs. There will come a time whereby the people will have had enough and smart politicians will campaign on that basis. The first steps will be to balance budgets and that will require increasing taxes and cutting spending. Austerity is likely to re-enter the political, economic and consumer conversation for the first time in a long time.  

The world sits as a virtual tinder box awaiting a match to set it alight in a way that has not been seen in my lifetime. I know we’ve seen 9/11, the GFC, and the Gulf wars, but the set of circumstances the world now faces are potentially more concerning than at any of those times. I say potentially, and that is key, things may not play out that way, but from an investment perspective prepare for the worst and hope for the best.  

Regardless of the situation I am extremely optimistic about the future for both investment markets and the world. There will always be set back and conflict but time after time people rise up and continue to succeed. Maybe in the decades ahead we can look forward to a transition to a more peaceful Wisdom Age but for now there is much to be excited about as we enter the Knowledge Age.  

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

AI End Game

This is a partial warning as much as it is my simple and developing view on Artificial Intelligence (AI). It is one of those transformative technologies that has now progressed to the point where I don’t think it’s possible to put the genie back in the bottle. Perhaps its timely that a movie such as Oppenheimer, detailing the Manhattan Project and the creation of the first nuclear weapons has recently been released. It should serve as a cautionary tale for all those blindly espousing the virtues of an AI world as it has the potential to cause great harm and negatively change society as we know it.

I have previously written about the exciting investment opportunities that AI brings to the world. However, I am also convinced that from an existential perspective, in my opinion, AI is also the single biggest threat that the world faces today. More serious than climate change, more serious than nuclear war. Those matters are within our control as humans. AI and its progress from a certain point in the near future are not.

The world is at a similar point to where it was back in WWII when the Manhattan Project commenced. Back then it was the possibility that the Germans may have access to or may soon be able to develop nuclear weapons that lead the USA to actually create them.

Ironically, the best strategy for defending the world against the potential weapons led to the creation of those very weapons of mass destruction that cannot be reversed. But what if the USA didn’t create them, quite possibly it ends up later down the track being something that Germany did create. What happens then? That’s the alternate argument for what happens if we don’t progress with AI hard.

If I sit back and forget the obvious economic and investment opportunities and consider the future of the world (probably something worth thinking about), I am certain that the advancement of AI will lead to catastrophic consequences for humans. The prospect of a dystopian future might sound like science fiction until it happens, then it’s simply called science. It doesn’t keep me up at night because it’s not something any of us can control. The cat is out of the bag.

But unlike many who see the potential for catastrophe, I do not necessarily believe we should overregulate or slow the development of AI. The reason for this is that other countries will not slow down in their development of AI technology. Similar to the rationale for the US racing to create nuclear weapons before the Germans. Whether it’s Russia or China, in a similar vein to the development of nuclear weapons, the risk that enemies advance more quickly is the bigger threat.

AI is more dangerous in an existential sense for the human race simply because we risk not being able to control it once it becomes more advanced. This is self-learning technology, so the technology will advance exponentially to human level, and then beyond to the point where humans become redundant. That day will arrive at some point in the future, whether it’s 10, 50 or 100-years’ time, I don’t know, but it will certainly arrive. When it does, do we want that technology to be a western influenced AI or one that’s been designed and developed in Russia or China?

If AI once debased from the control of humans can cause bad consequences for us, then it stands to reason that it can also create good. So, if we apply the same game theory to this as we did to the development of nuclear weapons then the answer is to move as quickly as possible so that whatever the result it is a consequence that we control as much as possible before others do. It’s the best available decision based on the fact enemy nations may otherwise create the AI that controls the world.

It’s important to note that while for years mutually assured destruction is the theory that has kept the world’s nuclear powers from starting a nuclear war for the past 70-plus years, that will likely not apply to the world of AI. The strategy must move quickly with investment in AI technology from government that can counter the rising danger of AI from enemy nations at the same time as developing AI for the benefit of the world. It is not the best solution, the best solution would be to stop it altogether, but that is unrealistic. It may be counter-intuitive, but I believe the best practical solution is to move as quickly as possible and build the AI resources that can combat those who would do us harm.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Balaji’s Bet

Amidst the emergence of the banking issues, US entrepreneur and former partner at prominent Silicon Valley venture capital firm Andreessen Horowitz, Balaji Srinivasan made a very public bet on Twitter. He bet $2m that the price of bitcoin will go to US$1m in 90 days. Given the price of bitcoin at the time was about US$26,000, it’s an aggressive bet and it certainly gained a lot of attention. The good news is that we will know very quickly just how clever he is. The bad news is that if he is right then the world is in far more trouble than anyone is prepared for. I’ve had a few people ask me about this, so I thought I'd provide my thoughts more publicly. 

Over the past decade, Balaji has amassed a huge following in tech and cryptocurrency circles. He also gained prominence over the past few years for his predictions on a range of topics including how Covid would play out. He is a smart guy and is very influential within the tech and VC space. His views on the banking system and the pace of change are extreme. His rationale for his position is his prediction of imminent hyperinflation, his concerns around the bond losses the banks hold and ultimately the collapse of the USD. He views bitcoin as the likely replacement.

For the record, I think he’s completely wrong for several reasons but it's worth exploring his rationale and the counter points. Financial markets are always a melting pot of diverse views and sometimes the most unusual perspectives prove to be right. Considering different viewpoints in a critical manner is always worthwhile even if it is especially unusual or extreme. It’s always worth understanding the rationale behind someone's position.

Firstly, in the short term, a US banking crisis is likely to be deflationary rather than inflationary. The real risk for the economy right now is if banks tighten their lending criteria and start to hoard cash for their own liquidity. That potentially starves businesses, consumers and the economy of the capital that generates economic activity. This would more likely lead to an old-fashioned credit crunch which would hammer economic growth. So, an escalation of the banking crisis he predicts is not inflationary at all and may well ‘cure’ the inflation problem. 

Secondly, in anticipation of a credit crunch or recession, the impact on interest rates is more likely to change from rate rises to cuts very quickly. The bond market is already telling us rate cuts are coming with 2-year bond yields dropping from about 5.05% to 3.94% in a matter of 3 weeks. Bond markets are now pricing in several rate cuts in 2023 even though the Fed’s position is that this is unlikely. The implications are that the tightening in the banking sector is effectively acting like added interest rate hikes which will further dampen inflation. The hyperinflation argument seems extreme and unlikely. 

Thirdly, any interest rate cuts would quickly erase a sizeable part of the unrealised bond losses that many institutions are carrying on their balance sheet. These unrealised bond losses are a big part of the problem at the banks, and a central part of the Balaji thesis. Whether interest rates come down due to market forces or because the Fed deliberately changes course is largely irrelevant. If interest rates do come down, it will reduce the bond losses that banks carry, which will alleviate the pressure on the bad bond investments in the banking system.

The unrealised bond losses are a significant issue for banks, but it's not necessarily the existential issue Balaji seems to fear. The US govt can simply choose a different interest rate policy. If push comes to shove and the Fed must choose between addressing a bigger issue in the banking system or inflation its likely they choose the biggest immediate threat. That would mean dropping rates due to banking issues and dealing with inflation later.

While there are not many tools at the disposal of the Fed to fight inflation, they have lots of tools to deal with bank issues. In the face of Bitcoin appearing as a threat to US hegemony, I would say that laws in the US would change rapidly. I'm not saying that’s a good thing but I'm a realist. As great as all the tech and VC gurus think bitcoin is for the future of a utopian world, if it’s a threat to the US and its dominance, they will restrict it and suffocate it, or even make it illegal if needed. I would not underestimate the US govt ability or willingness to protect itself by any means necessary if its position is threatened.

While I do think cryptocurrencies may be the future of money, I am not convinced that it will be bitcoin. Even if it should be, the control of the monetary system is far too important for governments to relinquish control. Additionally, there is a major risk in holding bitcoin that it has no intrinsic value and that its price is simply determined by the flow of money in and out. If a more technologically advanced and energy-efficient cryptocurrency ends up being adopted, then bitcoin will end up worthless as everyone moves across to the new coin. 

I think that Balaji’s prediction is a combination of self-promotion combined with limited downside risk. He knows that as money moves out of banks, some will certainly find its way into bitcoin, limiting the downside risk, while all the publicity and uncertainty puts upward pressure on the price. Overall, I suspect as part of the Silicon Valley clique that is very bullish on cryptocurrencies and exposed directly to the collapse of Silicon Valley Bank that he’s just a little too close to the situation to see the forest for the trees. A little like a conspiracy theorist who goes down a rabbit hole and continually reaffirms their theories in an endless stream of combined confirmation bias and group think. 

What’s certain is that you’ll increasingly hear and read these types of Armageddon predictions as the global economy head into recession. But there is an enormous difference between a recession, even a bad one, and the type of predictions the most extreme people will start to espouse. In times of uncertainty fear mongering escalates and is an easy way to grab attention and headlines.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Seeing the Forest for the Trees

Amongst the sheer volume of urgent daily events, detail, and information to digest at the moment, the most important attribute for investors is to ensure that it doesn’t distract them from what matters most. Think long term. At a time like this, when everything seems to be on a knife edge, it is critical for investors to understand they need to zoom back out and not allow themselves to be engulfed by the all-consuming urgency of the 24-hour news cycle. It will overwhelm your thinking if you let it.

That said, the current short-term events from war in Ukraine, to supply chain disruptions, and inflation, do have significant long-term implications too. So, it’s important to understand that the macroeconomic and geopolitical events occurring now are changing the world. Understand also that unless there is a serious escalation in the war, investment markets will adjust and move on. But it is important to look through all the data and news and work out what actually matters from an investment perspective.

The main short-term trends are:

• Inflation was already heading higher across the world due to supply chain issues

• The war in Ukraine makes this worse as it’s forced almost every commodity price to increase

• The food commodity shortage has the potential to be an economic & humanitarian disaster

• Europe heading for recession with a low growth and high inflation environment which is bad

• USA is similar to Europe, but they have a better economic backdrop and prospects

• Australia is in a better position. Yes, high inflation is coming but likely higher growth too

Short term trends do matter for long term investors. They bring opportunities to take profit on an overpriced stock or buy an undervalued company. The short-term volatility will impact your entry and exit points for assets, the timing of when you might invest. This is especially an issue for new portfolios being established. However, it’s more important to understand the impact of the current situation on long-term global trends and adjust accordingly.

The main long-term trends are:

• Significant increase in defense spending globally

• Globalisation unwinding in preference for national interests

• Long term economic decoupling from China and the West

• Energy independence and growth in national renewable energy sources

• Sustainability refocuses to start with national security strategy

• Technological advancements continue regardless

Long term trends influence where you will invest. The increase in defense budgets globally will create huge demand and growth for a range of businesses across industries, not only defense. After decades of underinvestment in defence and short-sighted strategic thinking, the current crisis has awakened most countries to the need to become increasingly self-sufficient with more turbulent times ahead.

Chinese stocks and US listed Chinese companies, regardless of their returns and potential, remain uninvestable as far as I am concerned. Even when they are attractively priced, these companies (eg Alibaba, Baidu, Tencent) risk being torpedoed by their government on a whim, without notice. It makes the allocation of portfolio capital to this area too high a risk.

Beyond the obvious though, unless China categorically distances itself from Russia, the likely result is the West doing to China what they did to Russia, but over a 10-to-15-year time frame. So significant realignment is coming for all businesses doing business with China over the next decade. The flip side is more opportunities for businesses in Europe, the USA and Australia.

Energy across the board will be a huge focus. In the short term, it’s great for almost all energy companies as there simply needs to be more energy supply secured by Western nations. Long term, I expect a rapid rise in renewable energy as the climate issue merges with the strategic national security issue. Governments will push hard here for many years ahead, climate and sustainability will be the sell to the community, but the end game here is securing energy independence and national security.

The flow on effect of these huge new capital allocations are important.

But the #1 most important long term mega trend remains the continuous disruption of technology. Don’t lose sight of that. Even in a market where most tech stocks are out of favour, that remains the most important trend. It influences almost every investment decision I make. It influences the types of companies we buy shares in and those we avoid, which is just as important.

The short-term issues may impact the prices we pay and the timing of investments but behind the scenes, all sorts of incredible companies are continuing to work relentlessly to change the future. So, understand what’s going on in the short term, because it is important, but keep focused on the long term because that’s what really matters for long term investment returns.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

What History Teaches Us About Finding the Next Giant Tech Companies

If history has taught us anything it is that there are patterns that tend to repeat. I find these patterns often flag the warning signs that are useful reminders of the negative consequences of past cycles and events. Over the course of history these apply to all sorts of situations including overheated markets & stock market crashes, geopolitical tensions & war, and government spending & debt crises.

Investors though are not typically very good at studying history (or at least remembering it). It is one of the reasons why there will always be booms and busts. Partially, its due to human behavior driven by fear and greed and by the time those investors gain the necessary experience to take advantage of similar events as they repeat there is a new batch of people seeing a situation unfold for the first time. But failing to learn from history does not only apply to dramatic catastrophes.

We often overlook the patterns of success too.

The great companies of the last 10-20 years, Amazon, Apple, Google, and Microsoft are all trillion-dollar plus companies today. In the past 10 years, the share prices of these companies have increased in value by 10x or more. They have seen extraordinary growth and they are all still rapidly growing companies despite their size.

Perhaps the most interesting thing to me is that 10 years ago they were already huge companies. They were market leaders that many thought were overpriced and didn’t buy. Back then they were $100b and $200b companies. For many, it was difficult to see the upside. They were viewed as expensive. My point here is that to find the next tech giants that deliver exceptional long term returns we don’t need to scour the earth looking at small companies. High growth large companies have that potential too.

People generally aren’t great at conceptualizing or comprehending exponential growth over the long term, especially when that growth rate is very high. A company share price worth $1 increasing by 10% per annum would be at $4.18 after 15 years. Compare that to a $1 company share price that increases by 20% per annum and after 15 years it would be at $15.41. From there it starts to get ridiculous but for the sake of the exercise I’ll continue. At 30% per annum a company with a $1 share price would reach $51.19 a share after 15 years.

What history tells me is that the next giant tech companies are already well-known companies we (or our kids or grandkids) use every day. They are emerging global leaders and even though they may worth $50b to $200b they are still growing at 15%-20% plus per annum. It is possible that some of these companies become the trillion-dollar companies of the next 10 years. In the next few weeks, I’ll write more on this topic and outline the attributes I look for in these types of businesses and provide a few examples of stocks I think have this potential.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Everything on Demand

My major takeaway from 2021 is a simple one, and as basic as it may initially sound, it is a foundational pillar of my investment thesis about the future.

People today, of all ages, have come to expect life to be easy.

It may sound like the start of a ‘get off my lawn’ style rant from an old man, but it is not. It’s an observation of the way society and the consumer has evolved over many years. It is especially important to understand because the overriding psychological mindset of the population drives all consumer behaviour and ultimately the businesses and stocks, we invest in.

Almost all of the technological trends evolving today are driven by removing friction from existing processes and creating faster, more efficient ways of doing business and consuming goods and services. The rise of the entire buy now, pay later sector is a case in point. We expect life to be easy. We want everything now and we don’t want to wait. We want tv and movies streamed on demand. We want our food delivered on demand.

On the downside, we have come to expect governments to bail us out on demand. We have come to expect employers to fix our problems. We don’t expect to deal with any of the pain. We talk about accountability but rarely with respect to our ourselves. As a society we seem unable to deal with a situation if isn’t easy. Presumably giving every kid a trophy for the past 35 years hasn’t helped this.

Today, the relationship between government and the people has developed into a similar dynamic to that of the parent and the spoiled brat child we all know from somewhere. Parent says no, spoiled brat cries, parent gives in. It is a recipe for disaster for both the future of the child and the economy.

What has been lacking is for government to ignore the cries of the people and let them endure a degree of genuine hardship, for their own good in the long run. For the last 15 years, pandering governments have offered continuous accommodations, money printing and economic stimulus at the hint of every problem.

Thankfully, this will soon stop.

The fact that there is now higher inflation, regardless of the causes, will necessitate governments increasing interest rates and pulling back from their excessively accommodative stances going forward. It will be interesting to see if governments hold their nerve. In the past they have not followed through, but it is now overdue.

Of course, this goes in cycles.

Hard times develop resilience and patience in the population. Whether through The Great Depression or WW1 and WW2, the generations that lived through genuinely tough times had their work ethic and perspective on life shaped by those experiences. It also shaped the consumer behaviours of the day and the companies that grew to meet their needs. It’s no different today as companies meet new needs. 

Conversely, success leads to complacency and then to failure and ultimately change. It applies to nations as much as it does to technological disruption or your favourite sporting team.

From a societal perspective, those that experience relatively easy times become complacent and entitled. In the absence of any unexpected and genuine hardships, the rise of technology will continue to enable easier and easier lives, facilitating everything ‘on demand’ and the expectation of more to come.

In my opinion, the continued rise of technology is the most important and impactful investment theme in the world today. But the most important factor driving the consumer behaviours, that build the businesses we invest in for the future, is overwhelmingly that people have come to expect their lives to be easy. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Converging Technology: Driverless Vehicles

Bill Gates once said, “people overestimate what can be achieved in one year, but underestimate what can be achieved in ten years”. This is especially true of the disruptive nature of technology. It seems so far away until suddenly its right in front of you. That is exponential growth at work. 

Consider driverless vehicles. This one technological subset will probably be the most visible example of hundreds that demonstrate the convergence between automation, robotics, and artificial intelligence. Not just cars but trucks and every other mode of transport that currently requires a human to drive it. They will not only be autonomous robots they will be connected learning machines aggregating data from all users across the globe to create massive efficiency.

Soon enough families will no longer own a car. They will subscribe to Transport-as-a-service. It will save them thousands of dollars a year and be incredibly efficient. Not to mention hundreds of hours a year of time freed up for each person. By 2030 this will likely be a reality. By then many industries will have changed significantly and the companies that are the winners and losers already defined. 

Imagine the not-too-distant future where you have an appointment. You won’t need to order the car; it will know your routine and schedule. The driverless Tesla connected with Uber and integrated seamlessly to your calendar will send you a notification upon approach. The car will arrive at your front door exactly at the time required to ensure you are at your destination on time. It will consider the traffic and weather conditions and know if you will be out the front waiting or dawdle out 5 minutes later. 

Their integration though will not be without challenges or controversy along the way. They will eliminate millions of jobs, most obviously it means no more truck drivers, bus, taxi, or train drivers. Yet as we have seen throughout history, it is likely that many millions more will be created in industries that are only just emerging or not yet invented. Upskilling, education, and entrepreneurship will boom.

With over 90% of road accidents resulting from human error they will prove to be significantly safer than human drivers. But they won’t be perfect and no doubt the media will spark fear with every mishap or accident until they become mainstream. But once driverless vehicles are adopted across the board, they will virtually eliminate road deaths and road accidents. Insurance companies and road safety authorities will all be on board and in the end, statistics will win out and lives will be saved.

It has massive implications for not just the economy but society. Frees up first responders, police, paramedics, emergency wards, massively reduced insurance premiums, no one will own a car, no need for car parks as cars will operate 24/7 stopping only for maintenance, no more smash repair businesses because there are no crashes. No more car theft. Massive reductions in pollution. As with all computing devices they will become cheaper and more powerful over time. It will ultimately reduce the costs of logistics and the price of goods. 

Agriculture, mining, manufacturing, and logistics are all industries that will see once in a lifetime reduction in costs and increases in productivity. This will translate into significant increases in profits, equating to increased returns for shareholders both from dividends and higher stock prices. We are talking about trillions of dollars globally. 

This is not an incremental change; it’s going to completely change the world. All this from just driverless vehicles. So, consider the dozens of similar changes that will occur in other industries from retail and hospitality to health and finance as automation, robotics, and artificial intelligence become standard.

It is my view that investors are too focused on the short term and medium term and drastically underestimate the real pace of change. As these changes occur at an ever-accelerating rate it is more important than ever to position your portfolio for the long term (10 years plus). Investors need to consider more deeply what the future will look like, the companies that will transform it, those that will be out of business because of it and those that can adapt and will benefit from it.

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.