Introduction:
Why Invest Within Innovation?
Risks Of Investing Within Innovation:
Everything Money Investing Strategy Analysis:
Firstly, I totally respect the hosts at Everything Money. The reason for writing is to share my experience within markets, a unique approach I feel works for myself, and to perhaps present a contrarian view on investing.
Decentralisation of thought is vital for investors, and one of the benefits with the recent rise of content related finance is the ability to grapple with a range of ideas, and therefore come to one’s own conclusion.
Innovation can come within a range of ways. And, importantly to note, investing within innovation does not have to be highly speculative, or analogous to a gamble. Investing within the future can come in a range of ways.
Introduction:
Within this article I want to analyse, and go over the difference within investing styles in regards to innovative investing, and value investing.
The big positive within content creation online – specifically financial content creation – is the ability to garner a range of different viewpoints, and therefore come to your own conclusion in terms of how to invest, and where to place capital.
I will advocate for a more concentrated approach to investing, specifically with the focus on innovation and the future. I understand that this is perceived as very risky, however I want to point out my nuanced reasoning as to why I believe this approach can be superior to that of value investing.
“Investing in innovation is not speculation. Investing in innovation can be achieved with a margin of safety. Investing in innovation can produce results.”
Why Invest Within Innovation?
We Are On The Cusp Of Technological Change:
Over the past few years, there has been a major boom within investing, specifically within more speculative investments. This has given rise to a new form of investing, namely innovative investing. ARK Invest & Cathie Wood took the lead with their sudden and theatrical rise in popularity – specifically over the past few years – in which markets experienced a major bull run.
Whilst that rise in popularity for Cathie Wood has not lasted, I believe that there are major lessons we as investors can learn regarding investing in innovation, and the future.
Firstly, I believe that investing within innovation is key for investors nowadays based on the apparent technological revolution society has experienced, and will experience in the next 10+ years. Fundamentally, society is at a true inflection point in which technological change in the near future will (once again) change the fabric and very nature of society. I want to be in front of this.
Now, before we get to the why society is on the cusp of an innovative boom, I want to highlight an important nuance.
This nuance is in relation to the past.
In the past, there has been ample times in which society – similarly to today – have proclaimed that future innovation will be outstanding, and far outpace the innovation experienced within the current date. However, far too often, we have seen that these optimistic claims about the future of innovation have fizzled out, solely becoming “thought bubbles”, in comparison to real innovative technological output.
An example that comes to mind is back within the early 2000s, more specifically the DOTCOM bubble. To put it kindly, the DOTCOM bubble was a period of mass optimism, yet little true output. The DOTCOM bubble was an example of a thought bubble, and this was reflected within the crash of equities.
Another example, seen more recently, was within Bitcoin & the cryptocurrency scene.
What can be seen is an array of periods in which society proclaimed that new technologies would disrupt, and take over, however what actually occurred was a speculative bubble with little-to-no true output.
But, as with everything in life, true nuance is where value is found.
I believe that it is far too reductionistic to state that these prior bubbles should set an indefinite precedent in regard to the inability to invest within innovation.
One commonality between cryptocurrencies, DOTCOM and prior innovative bubbles is that no real output was ever produced.
Within the case of DOTCOM, people were investing based on technologies “that were going to be built in the future”. During this era, companies that did not even have any products, but solely had an idea related to the internet, were receiving $100Ms in investments.
This time is different (famous last words).
It is extremely evident to see that now, within today’s society, there is clear technological change occurring. Either the uprise within psychedelics, general AI, or perhaps even EVOTLs, it is clear to see that these technologies are being worked on – and will be implemented within everyday life.
Society is not stagnant, and innovation moves society forward. I believe that this innovation can be predicted, and that this innovation can produce specular investments.
Ray Dalio recently mentioned that:
“The most important force over a long period of time is a man’s adaptability and inventiveness.”
I believe that this adaptability, and inventiveness is in reference to innovation.
Changing World Structure:
Furthermore, as we enter into this increasingly concerning period of chaos, deglobalisation and disharmony, judging from historical standards, this can lead to the presence of innovative booms. WW2 experienced a similar trend in which innovation drastically increased.
For example, during prior historical times of chaos, deglobalisation and disharmony, one major benefit from these periods was the fact that these time periods result within the invention of technologies that disrupted the fabric of society, and thus changed the course of humanity – forever.
The radar is one good example of this, as seen within WW2:
History shows us that during times of war, the most important innovative breakthroughs succeed. One that is particularly important was the use of the radar. The radar was a fundamental innovation that transformed Britain into a technological superstar during WW2.
Britain, before the use of the radar, were losing against the Nazis. It was almost inevitable that the Nazis would invade the small island, and win the war.
This was until the last minute introduction of the radar, in which totally changed the course of the war.
There are drastic similarities between the radar, and Palantir. In fact, I would go as far as stating that Palantir is as fundamental for the next century, as the radar was during the 1900s.
To explain further, there were serious predictions during WW2 that Britian would lose against the Nazis. In the looming battle between world powers, the allies lagged far behind the enemies in what Winston Churchil described as the “secret war”, or the race for the most powerful technologies. Germany had new submarines called U-Boats in which threatened to dominate the Atlantic, and strangled supply chains to Europe. The planes of the Nazis were ready to disseminate Britain, outclassed those held by the British. And, the horrific discovery of nuclear fusion, put Hitler within reach of a weapon with almost unfathomable power. The enemies were winning.
The radar changed this.
One Chief wrote that the idea was a “wild dream with practically no chance of real success”. However, just a few years later, and this technology would change the course of history.
It was only until the 1940s in which the US Government recognised the lead that the enemies had when it came to technological innovation. This resulted in a specialised team that was put together to nurture, and create loonshot innovations.
By the end of the 1940s, a team of the best physicians and technologists came together to develop the Microwave Radar. This was over 10 years after the initial discovery of the technology.
In July, Hitler attacked. His generals anticipated the Luftwaffe, which had twice as many planes as the RAF, would achieve air superiority in two to four weeks.
Hitler’s generals developed plans for a land invasion of Britian, in which would follow the victory in the air. This victory would never come.
British radar would detect enemy aircrafts before they neared the costs. This intelligence enabled Britain to concentrate their limited forces against each wave of attack. One German bomber pilot wrote: “if there were any more missions like that, our chances of survival would be nil”.
Two days later, Hitler postponed the land invasion of Britain. This was Hitlers first loss of the war. Fundamentally, the radar totally changed the direction of the war. The radar was one of the most influential reasons as to why Britain won the war.
The radar was one of the most influential technologies ever invented, and this invention was thanks to the chaos, disorder and disharmony, in which incentivised innovation.
Accelerated Law Of Returns:
This theory posits that technology change is exponential. Within the next 100 years, we will not experience 100 years of progress. But instead, we will experience over 20,000 years of progress within the next 100 years (at today’s rate).
Furthermore, and excitingly, Kurzweil suggests that there is even exponential growth within the rate of exponential growth. This means that, within a short period when machine intelligence surpasses human intelligence, this will lead to a singularity.
A singularity is a term used to indicate technological change that is so rapid and product, it creates a rupture in the fabric of human society.
The philosophy of exponential change, stating that within the next 100 years we will experience over 20,000 years of progress, evidently shows the huge potential to ride large innovative waves within markets.
Risks Of Investing Within Innovation:
Secular stagnation:
There is no guarantee that innovation shall prevail. Indefinite optimism may succeed instead, thus leading to stagnation.
Indefinite optimism is the societal belief that the future will be good, however nobody is currently working on the future being good. It seems that this principle of indefinite optimism leads to secular stagnation.
The reason as to why indefinite optimism occurs, and has perhaps occurred within the US over the past 30 years is based on an accumulation of factors that can not be explained easily. To put casually, indefinite optimism is likely based on:
- Dis-incentivisation of risk
- Educational system encouraging diversification, instead of concentration
- Governmental regulations
We have experienced a dramatic rise within software, and the use of the internet – mainly thanks to new forms of permissionless leverage. However, outside of the internet, there has been little innovation.
For example, the airline industry has been fairly stagnant. The methods of flying have barely changed. The speed. Cost. Overall experience. Little has changed.
Similarly, is true within the case of building construction, or more specifically building houses. The process still takes many months, or even years, and the overall experience is incredibly archaic.
But, in many cases, this stagnation within certain specific industries can commonly become a place for opportunities. This should give us optimism.
It is fundamentally a necessity to understand that the notion of secular stagnation could result in a disruption for the world view that proclaims mass innovation shall proceed within the following years. Mass innovation is not guaranteed, and society could slip (further) into secular stagnation.
Secular stagnation would perhaps make it more difficult to recognise and find outstanding investment opportunities.
Disregarding Of Valuation:
After mass popularisation in recent time, Cathie Woods’ ARK Invest has dropped drastically over 80% YTD. It seems clear that upon hindsight, ARK Invest failed to properly understand the necessity for financial intrinsic valuation.
As stated in the past: Intrinsic value of a company = intangibles + financials. But, the obsession over one of these principles alone, can lead to a warped version of intrinsic reality. Investors must compute both sides of the equation equally, focusing both on intangible computations, and also financial computations.
ARK Invest solely focused – it seems – on the intangible factors, and even in many cases this analysis was flawed. However, this sole focus on intangible factors seems to have led ARK towards a skewed perception of reality.
One must compute financials, and intangibles within an equal manner. Both of these principles matter.
Everything Money Investing Strategy Analysis:
Financials In A Vacuum:
Whilst I have the upmost admiration for the analysis and research by “value investors”, I do believe that criticism is required for improvement and discussion.
One major issue I see within the investment style of a “value investor”, or at least the investment style proposed by Everything Money, is the ideology of consuming numbers within a vacuum.
Often, through the use of a stock valuation tool, investors can gain an understanding of the “intrinsic value” of that equity. And yes, whilst I agree with the necessity to “pay a reasonable price” for equities, I feel that looking at numbers alone for this analysis is heavily flawed.
The use of numbers alone to analyse an equity, disregards the use of intangible, qualitative factors that are often leading variables when it comes to the future financials of the company.
Intangible factors are often difficult to compute. Qualitative includes branding, technological moats, structure and talent. Rooted deeply within my investment strategy is the necessity to acknowledge these intangible factors, and thus to compile these into garnering an “intrinsic value” for equities.
Intrinsic value is not merely a financial equation, but it is also a compilation of qualitative intangible factors. This is why the pursuit for finding a universal intrinsic value calculator is impossible.
Intrinsic value of a company = intangibles + financials.
Tesla Intangibles 2019:
I often like to put myself within a thought experiment to highlight my point:
if you were to place yourself back within 2019, whilst Tesla was priced at $19.80 p/share, would you have been able to recognise the potential for severe growth?
Commonly, these “value investors” point towards “pure luck”, or “speculation” as a reason as to why early investors in Tesla succeeded so dramatically. However, I totally disagree. Upon hindsight, it seems clear to me that early investors in Tesla were not a function of pure luck and speculation, but instead were a function of an intangible, qualitative analysis of the company.
Early investors in Tesla could recognise that:
- Good talent was accumulating within the company
- Management and leadership was iconoclastic, and superior
- Organisational structure and incentives were pointed towards loonshots, rather than solely career growth
- Technological moats were undeniable
- No other competitors
And so on and so forth.
It would be utterly absurd to not acknowledge these qualitative advantages for Tesla back in 2019.
“Value investors” seem to converge over the idea that a company is solely the accumulation of financials. But, in reality, there are certain aspects of the business that can not be computed financially, or take time to compute financially. These qualitative principles must be taken into mind when making an investment.
Human Simplicity:
As humans, we obsess over the idea of simplicity, in an attempt to create order within the chaos. This is clearly replicated within the necessity to use “one single formulation” to compute whether an investment is good, or not.
But, this utter simplicity misses out on the mathematically un-computational factors of the business.
With Everything Money, I feel that they miss out on one key principle: nuance is where true value is found. The overly simplistic approach to investing misses the necessary key pillar to truly gaining alpha, and that is nuance.
Investments are not solely a function of financials. But, also an accumulation of intangible principles.
