Here’s one that’ll make you wince. Take a look at this, taken from a Newsweek piece in 1995:Is there any better way of understanding how people underestimate exponential trends than the phrase “we’ll soon buy books and newspapers straight over the Internet. Uh, sure…”?
The irony, of course, that in 1995 the direct, observable evidence that the internet/personal computing revolution would change the world was pretty flimsy.
Most people didn’t have email. Most had never even been on the internet. Those that did spent more time waiting for things to load via crappy dial-up connections than anything else. On the basis of those experiences then such scorn of “cyberbusiness” is reasonable.
Reasonable, but totally wrong.
So wrong that 25 years later people like me use quotes like that to make a point about how blind people are to major change.
Why is that?
On one level, I think it ties back in with a point I made yesterday. Our brains aren’t wired to understand exponential growth. We see incremental growth instead. And therefore we underestimate exponential growth until it is too late.
There’s more than that though. On a deeper level our brains aren’t particularly good at anticipating any form of radical change. We assume that yesterday, today and tomorrow will all be broadly the same. Most of the time this is exactly the case. We want to live in a stable, predictable world. And we apply this desire when we think about the future. This is known as “normalcy bias”.
The problem is this blinds us to the fact that – while there may be very little change between today and tomorrow – there will almost certainly be utterly transformative change over the longer term.
This is a fact of life. Compare the world today to that of 2009, 1999 and 1989. Consider the changes seen in that period. You could not use the terms “stable” or “predictable” to describe that time horizon.
To varying degrees, some combination of normalcy bias and an inability to understand the power of exponential growth account for the “Uh, sure” reaction to predictions of radical change.
As I want to show you today that can lead not just to looking stupid, but to missing out on life-changing investment opportunities. Radical change in the world can drive radical, rapid wealth creation.
Which is why you’re reading this letter, I’m guessing.
Here’s what it comes down to. Succeeding as an investor involves understanding what is going to change in the world and what is not going to change.
This requires you to identify the “agent” of that change. Identify it and you can understand it. Understand it and you can try and predict it. Predict it correctly and you can profit from it. Depending on how right you are – and your time horizons – those profits could be extraordinary.
Which, by the way, is exactly what Southbank Investment Research exists to help you do. To help you become the master of mega change – not at its mercy.
Let’s look at the last 20 years. Some things have changed. Some haven’t. Between 1990 and today, the fundamentals of how we live our lives haven’t changed, but the methods, technology and businesses that supply the things we want have completely changed.
That’s because five major industries have been disrupted by exponential technology. A big part of this is the internet. But really the change goes much deeper. The exponential trend in computing speeds, known as Moore’s Law, has rewritten the laws of business.
Amazon sells the same products as high street shops…
But charges far less, provides anything you like without you leaving the house and gives you more choice. That’s because Amazon created an exponential disruption in the retail market.
Another example: Netflix provides TV series and films, just like Blockbuster did in the 1990s. But it gives you more choice and is much cheaper. That’s because of the exponential disruption to the entertainment industry.
The people we talk to and what we say to each other hasn’t changed. But instead of writing letters, making expensive long-distance phone calls or looking businesses up in the Yellow Pages… we can now communicate instantly with each other and with businesses we’re interested in, for free.
Uber provides transportation, just like black cabs did in the 90s. The difference? Instead of standing outside in the cold hoping to hail a cab, then paying out your nose for a driver who spent two years training in “The Knowledge”, the driver pulls up within a couple of minutes. They have your destination programmed into their maps app and get you there just as quickly for a fraction of the price, all paid through the app so no haggling or cash required.
You get the picture.
Now layer in the financial side. How much money could you have made by seeing just one of these changes coming ahead of time?
Take Amazon. In 1997 – the “Uh, sure” period – you could picked up a share for less than $2. It now trades at $1,833. Roughly speaking that’s 900 times your money. Not bad.
There were bumps on the road. And there were no guarantees of success. But I’m going to stick my neck out and say that 900 times your money is an “exponential” return – ie, one worth pursuing with some long-term capital.
Another example to underline the point. Netflix may be falling out of fashion now. But a decade ago one share of the business cost less than $5. Today shares trade at $290 (having traded as high as $395).
Not bad. Now think on this. How many stocks do you hold that tap into an exponential trend? I’m not suggesting every stock you own should. But I think if you want to generate big long-term returns, some corner of your portfolio should be dedicated to the exponential not the incremental.
Publisher, Exponential Investor