(this is inaugurating the new quick writeup series, with the concept of “one idea, one dataset, one hour to write it”)
Catching the tide
This blog is focused on finding large, long-term cycles and using them to find good companies to invest in.
The reasoning being is from my experience as an entrepreneur. I tried probably a dozen types of products, business models, industries, etc… What I learned is a key part is not how smart you are, how hard you work, all these obvious things that should make you successful.
What works the best/easiest is a rising tide. If the sector you are in is booming, you will do fine even with a half-baked idea. Simply put, you can swim with the tide and catch success a lot easier. Your talent, hard work, etc… are multipliers, but you want to start with an advantage.
If Steve Job had focused his lifework on argentic photography, you would have never heard of him (but he would probably have managed to dominate his industry).
The rising tide of our time
Several trends have run for decades now.
1/ Financialisation. We have engineered more and more complex financial systems, draining profit away from heavy assets and into stocks, bonds, ETFs, and such. Money printing was the driver behind that.
2/ Globalization. In the post-cold war era, arbitrage was risk-free, so why not move the entire supply chain overseas to 12 different countries?
3/ The domination of the economy by “bits”. “Software is eating the world!” The old economy is over, the future is here! Computing, streaming, cloud, AI, robotics, social networks, e-commerce, search engine, smartphones, gig economy, app store, VoIP, AR/VR, SaaS, IoT, ...
All these new business models are heavily financialized and globalized, each of the trends reinforces each other.
The old economy was not built over computer bits, but atoms. Farms, Ranches, Steel mills, mines, assembly lines, railroads, ships, harbors, oil wells, refineries, … Big, heavy, dirty, outdated, resource-consuming, and planet-killing industries the whole lot of them!
We have passed that right?
In the Western collective psyche, we are getting over the need for “real” industries. This is not the future, right?
The little left we need can be kept out of sight in China, India, Indonesia, some poor areas fine with suffering them.
Luckily we are not anymore driving cars, heating homes, building bridges, etc… And we are not shipping parts and components in ships carrying tens of thousands of metal containers every single day all over the world. Or needing reliable energy sources to keep the power grid on.
And it’s not like warships and steel-plated tanks are still something actively used to conquer other countries. We are passed that too.
Our common reality is luckily that post-scarcity Star Trek utopia.
Right?
The collective psyche has a lot of impact on investing and valuation. We deluded ourselves into believing we have solved the need for atoms and calories. We believe we can live off speculation and software only.
So we stop valuing correctly the means of production for atoms and calories and overvalue bits and software.
The great disconnect
Maybe at no time in history have we been so disconnected from what sustains us. Food appears in shops or via Uber Eat, goods out of a home-delivered Amazon box.
So is it a surprise we value financial instruments so much higher than “real” stuff? Just look at the S&P500 vs commodity ratio from last February:
Do you think the recent Russia panic and the rise in oil and metal prices corrected it?
Think again!
(I highly recommend these 2 Twitter accounts above by the way)
Conclusion
There are 2 ways to look at these graphs.
Stocks are horribly overvalued.
Commodities are horribly undervalued.
Probably a bit of both. I really don’t care.
As an investor, I know which of the 2 sectors I want exposure to. Ans which to run away from.
Bits are dead, long live the atoms
In the next quick idea (probably next week), I will point out that when it comes to making money from atoms, another cycle should be considered as well.