This is the transcript of a speech Christopher Tsai, New York-based founder of Tsai Capital, gave earlier this year on investing in an era of rapidly changing technology. In it, he outlines three key points:
Investors continuously underestimate the speed at which disruption transforms society and business
In an age of rapid technological change, we need to approach valuation, not with heuristics, but with new eyes
We should use diversification, not only to play defence, but also to play offence. We don’t need a bad-ass, 3 stock portfolio to outperform the market.
Christopher makes the point that disruption is more than cutting edge technological disruption, despite the fact we are seeing plenty of that today (Novo Nordisk in healthcare, Nvidia in technology are two obvious examples that come to mind). He points to business model disruptions that have challenged traditional ways of doing things (an example he mentions in his speech is Dollar Shave Club’s challenge to Gillette).
The most profound moments of disruption are when these two forms of disruption arrive together. Where new forms of technology drive disruption in traditional business models. A clear example we’ve all lived through is the arrival of the iPhone, which ushered in both a new era of mobile technology but also completely new ways for the mobile ecosystem to do business.
Tsai makes the case that understanding disruption is important, because the pace of disruption is accelerating.
McKinsey have found that the average life span of a company in the S&P 500 index is 18 years. Back in 1958, that average life span was 61 years. Moreover, since 2000, half of the companies listed on the Fortune 500 have either gone bankrupt or been acquired. Disruption has always been a fact of life. But these are signs that we’re living through an age of accelerating disruption.
This pace of change and disruption should make us reconsider what we consider long-term investments. When we’re talking about individual companies (as opposed to indexes) our grandparents lived in an era where they could hold great companies for most of their investing lives. If the trend McKinsey identified continues, we may only have great companies in our portfolios for a couples of decades before the search begins again.
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