New Economy or Old Economy?

One of the better pieces of writing I’ve stumbled across of late has been from Hamish Douglass (Magellan) in his annual letter to investors. Hamish is an outstanding listed stock picker with a reputation as one of Australia’s smartest money men. His article talks to the rampant technological advancement currently occurring, and predicted to accelerate, and then walks through his 8 technology predictions over the medium term. It is a must read.

Large parts of his letter support a personal thesis that provided the impetus for me to recently jump from corporate into startup land:

As investors, I think we need to question whether we are entering a new technological and machine age over the next 10–25 years that could disrupt most businesses and possibly society as we know it.

Hamish lists his top 8 technology predictions and walks through (briefly) the impact that some of these predictions may have on the economy as we know it. While none of the 8 are particularly outlandish (or even insightful), it is refreshing to see a traditional fund manager taking notice and thinking through the implications.

I recently read Ben Horowitz’s seminal work The Hard Thing About Hard Things (thanks George Freney of Booodl for the book tip). In the opening pages Ben talks through his experience of rapid technological change with Netscape and the Internet around the turn of the millennium. He recalls the IPO of Netscape in August 1995:

The Netscape IPO was both spectacular and historic. The stock initially priced at $14 per share, but a last-minute decision doubled the initial offering to $28 per share. It spiked to $75 — nearly a record for a first-day gain — and closed at $58, giving Netscape a market value of nearly $3 billion on the day of the IPO.
The deal changed everything. Microsoft had been in business for more than a decade before its IPO; we’d been alive for sixteen months. Companies began to get defined as “new economy”or as “old economy”.

This last line really stuck with me. Every business should now be analysed according to either their ability to:

  1. Be Innovative: Will the business be able to commercialise new, industry-transformative ideas?
  2. Be nimble: Will the business be able to react to changing business practices and use cases that will almost certainly usurp their traditional model?

As Hamish describes, stocks should no longer be solely analysed on their profitability, financial stability or growth projections. Traditional broker analysis places little emphasis on a company’s ability to be innovative and nimble. Analyst forecasts deal with potentially industry changing technology through incremental model adjustments or risk-weighting of scenarios.

In reality, as the lessons of Kodak, Nokia and newspapers have taught, technological change leads to binary outcomes for stocks: “new economy” or “old economy”.

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