CHG Issue #194: Confessions of a Value Investor
A review of twenty years of the technology revolution and a change in investment strategy
It’s coming up on 23 years since the bottoming out of the Dot-Com Crash. While two decades may not seem significant in the shadow of history, the past 23 years have provided a lifetime of unprecedented technological advancements and growth. It is cliche to say the pace of technological advancement is increasing since that is a feature of technology but living through such change is an unmistakable experience.
The significance of this historical moment is not about future advancements, which are inevitable, but the opportunity to reflect on the past two decades and, with the benefit of hindsight, realize that we are only in the early innings of a self-reinforcing trend of exponential change marked by accelerating innovation, rapidly increasing capabilities, falling costs, and profound societal transformation.
The dawn of the 21st century witnessed the first attempts at the commercialization of the internet fueled by a massive investment bubble which popped soon after the calendars turned. Yet technology continued to advance in the ensuring years despite the vicissitudes of the markets and the promises of those ill-fated IPOs were slowly but surely realized, despite it taking the market 17 years to reach prior speculative heights. Over the past two decades, which were pockmarked by three evenly spaced crises— the Internet Bubble, the Global Financial Crisis, and the COVID pandemic—it has been easy to lose sight of the big picture that we are in the early innings of a secular trend.
So far, these early innings have been focused on frivolous consumerism through the proliferation of e-commerce and more recently the advent of social media, which has had the unfortunate side effects of causing a mental health crisis and throwing gasoline on a smoldering social crisis. However, as we move into the middle innings of this secular trend we are starting to see more serious applications of innovative technology such as AI, Robotics, and Crypto. These are things that could actually “change the world” instead of just giving us more apps to buy things and communicate with each other.
I came of age in the markets during the later innings of the Internet Bubble and started investing during the post-crash years. Admittedly, I was not buying tech during that time as my indoctrination in the markets was under the value investing/mean-reversion school of thought. I've spent many years waiting for reality to come crashing down on elevated tech valuations as it did in the early days of my career but also having been schooled in the Bayesian updating of priors I learned not to stubbornly hold onto outmoded ideas and face reality as it presented itself. The tension between these schools of thought manifested itself in brief embraces with tech stocks throughout the years. However, despite my knowing better, I could never drop the apprehension towards these highly volatile but highly lucrative investments. It wasn't until reading Alex Karp's recent book, The Technological Republic, that I've come to understand that my apprehension towards tech was not entirely misplaced.
Karp bemoans the Valley's focus on consumer apps and while reading it dawned on me that it wasn't my value investing roots that had held me back from a more energetic embrace of tech it was the was the Valley's focus on making unoriginal products to "disrupt" otherwise mundane aspects of life such as ordering takeout, hailing a taxi, buying shoes, books, etc. While I was an energetic user of these new creations, always praising the increased efficiency and convenience they offered for free (or a very low price), I always struggled to understand the economics of their utilitarian business models.
Amazon provided a masterclass in this lesson as it transformed itself from a profitless online book seller to the “everything store” with huge profits and sprawling businesses that touch every aspect of our lives today. Bezos' vision is hard to overstate, and I certainly did not see it at first, but once I did, I learned that lesson for good. The commercial and economic norms of a manufacturing-based economy do not apply to the new information-based, digital economy.
Fortunately, we are now entering the phase of this cycle where innovation is not simply focused on providing the next killer app that appeals to our most immediate and vulgar desires but is providing solutions to real problems. AI, Robotics, and Crypto, to name just a few of the latest technological marvels, are distinct from the first generation of technological advancements and signal that we are moving into a more enriching phase of this secular trend.
Social media gave rise to "doom scrolling" whereas AI can literally read all the written materials on any topic and then education and engage you in a dialogue on that topic. This is truly democratized knowledge because you can't simply lead a person to water, you must show them how to drink. All the great poets, philosophers, and thinkers of history can now be explained to the lay person and topics that were once only the purview of ivory tower dwellers are now within reach for the common person.
Though AI is currently being monetized through the Valley’s traditional consumer channels, its real impact lies beyond. Robotic advancements, coupled with AI models, could bring humanoid robots into our homes sooner than expected. Elon Musk's prediction of humanoid robots becoming the biggest product of all time underscores this potential.
Recently, I heard Vlad Tenev discuss the merging of TradFi and DeFi on CNBC. Despite past skepticism, his insights resonated with me. As a former bond trader, I recognize the precarious nature of our financial system. Decentralization could lead to more efficient and secure transactions, similar to India's digital transformation post-demonetization.
I anticipate a shift in investment strategy over the next twenty years. Previously, swimming against the current with contrarian positions was my approach. Now, I foresee investing with a more open mindset—not blind faith, but informed optimism. Future markets may see fewer traditional economic cycles and prolonged phases of sustained trends, like we’ve seen recently with the prolonged yield curve inversion. This fundamental shift will likely redefine market norms and continue to expand the definition of commodities to include data, information, and knowledge.
The lessons from the last twenty years remind us that we are still in the early innings of this trend of exponential change. As we move forward, we must be prepared to adapt to rapid advancements in technologies like AI, Robotics, and Blockchain, which promise to reshape industries and societal, financial, and economic norms. Although the future may be unpredictable, our ability to embrace change and rethink traditional methods will be crucial for success in this evolving landscape.
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