Our stock markets are changing faster than at any other time in history. Failure to adapt could gut your portfolio
Last week, Amazon joined Apple, Alphabet, and Microsoft in reaching a $1 trillion market cap, and in doing so, confirmed a massive change in our economy and our investment markets.
Amazon achieved the milestone on the back of a blockbuster earnings report. The company’s fourth-quarter earnings of $6.47 per share crushed estimates of $4.03 per share. Shares surged nearly 10% in early trading last Thursday.
Now, at face value, this is simply great news for Amazon investors.
But the milestone is also yet another manifestation of a trend that’s been gaining momentum over the last decade now … and it’s only going to intensify.
The preeminence of tech.
As investors, it’s critical we take note and address this reality in our portfolios.
You see, it’s not just about finding tomorrow’s big winners … it’s also about avoiding tomorrow’s big losers.
As you know, the dark side of tech is the creative destruction of yesterday’s technologies. Investors who don’t adapt could find themselves holding a portfolio of slowly dying, wealth-destroying, has-beens.
So, in today’s Digest, let’s look at this rise of tech so that you can make sure you’re well-positioned for the coming decade.
The changing of the guard
The stock markets are changing.
And not just which stocks are most popular — the nature of the stock markets are changing.
To illustrate, let’s look at the S&P 500.
For any readers who are unaware, the S&P 500 index is simply a collection of some of the largest stocks traded on U.S. stock exchanges (it actually contains 505 stocks, despite its name).
As companies rise or fall in value, or as they’re acquired by larger companies, it means any individual company can drop off the S&P or be added to it.
For example, just last week, one of Louis Navellier’s recommendations was added to the S&P 500 after another S&P 500 stock — Centene — was acquired by WellCare. This left an open spot in the index, and Louis’ pick fit the bill (it jumped 7% on the news).
This “revolving door” nature of the index means that, over time, the characteristics of the index itself can be a mirror of our economy and our stock market.
The graphic below highlights many household-names that were removed from the S&P between 2013-2017 (on the left side). You’ll also see the stocks that were added (on the right side).
Source: Innosight
Now, there’s an added wrinkle in all this …
***A research group called Innosight recently found that the average length of time a company spends on the S&P is shrinking
Innosight is a business consulting firm catering to C-level executives. In a research study it performed to help executives understand today’s corporate climate, it found that in 1964, the average company on the S&P lived on the index for an average of 33 years. By 2016, that number had shrunk to just 24 years.
Guess what it’s project to be by 2027.
12 years.
Why? What’s behind this?
Technological shifts that leave behind those companies that don’t adapt.
From Innosight:
Viewed as a larger picture, S&P 500 turnover serves as a barometer for marketplace change.
Shrinking lifespans of companies on the list are in part driven by a complex combination of technology shifts and economic shocks, some of which are beyond the control of corporate leaders.
But frequently, companies miss opportunities to adapt or take advantage of these changes through economic innovation …
A gale force warning to leaders: at the current churn rate, about half of S&P 500 companies will be replaced over the next ten years.
Consider the “changes on the leaderboard” we’ve seen in just the last two decades courtesy of tech advancements.
In 2000, here were the top four largest companies on the S&P 500.
And what are they today? Let’s go with the top five …
Apple, Microsoft, Alphabet, Amazon, and Facebook.
Together, these companies now account for a staggering 17.5% of the S&P 500.
Here’s a great visual representation from earlier last week, before Amazon topped $1 trillion:
***We can also see the preeminence of tech by looking not only at market caps, but by brand value
Visual Capitalist recently ranked the most valued brands in the world.
Here are their results:
1. Amazon (tech)
2. Google (tech)
3. Apple (tech)
4. Microsoft (tech)
5. Samsung (tech)
6. ICBC (this is the Industrial and Commercial Bank of China — banking)
7. Facebook (tech)
8. Walmart (retail, though quickly increasing its digital footprint)
9. Pingan (the world’s most valued insurance brand from China — banking)
10. Huawei (tech)
This leaderboard has changed significantly in a short period of time. To illustrate, if we rewind to 2010, how many of these brands did we find on Visual Capitalist’s list?
Three.
You can also see tech dominance if we look at brand-value growth.
Visual Capitalist puts Tesla and Instagram as the top-two fastest growing brands in the world in 2019.
***Tech’s dominance will only speed up from here
We’ve hit the inflection point in tech’s growth curve where the gains are beginning to come exponentially, not linearly.
Below you can see the difference. The “old” industries add to their gains in a relatively straight-line manner, as illustrated below in red.
But with tech, the time between breakthrough advancements is getting shorter and shorter … which means growth is coming faster and faster. This is illustrated below in green.
The name for the dynamic which describes this is The Law of Accelerating Returns.
In short, each new technological step advances on a multiplicative basis, rather than an additive basis.
For example, the old way of growth was 1 + 1 = 2 … the next advancement comes and we add another “+1” to get “3.” The next step comes and we add another “+1” to get “4.”
But thanks to exponential progress and the Law of Accelerating Returns, this is changing — now we multiply the advancements.
So, take your first step … and double it. We’re at “2.” Now, take that “2” and double it again — we’re at “4.” Double it again, and we’re suddenly at “8.” Then “16.”
***The danger of the Law of Accelerating Returns
Companies that fail to harness technologic change and adapt it into their business models will be left behind.
The frightening reality is that this obsolescence will happen at a far-faster pace than in past decades — which means we investors need to be more aware of the stocks we’re holding, and their ability to adapt.
On a small-scale example, look at the difference between retailers Macy’s and Walmart.
Over the past decade, as Amazon changed the game in retail, Walmart has reacted faster than Macy’s.
For example, it added new mobile apps for both customers and employees … it has improved the shopper-purchase experience through online return-initiations … it has added a fleet of robots to facilitate restocking and inventory issues … it has largely automated its truck unloading and inventory sorting process … and it added a new concierge shopping service that uses artificial intelligence to deliver a curated assortment of products to its members.
Macy’s has been far slower to respond to the shifting retail preferences of the U.S. consumer.
So, what’s happened to their respective stocks over the last four years?
See for yourself.
If you haven’t done so recently, sit down and look at your portfolio. Refamiliarize yourself with what you own. Too many times, we go on autopilot and lose track of what’s happening.
To what extent are your stocks adapting to the advances of technology? Even a few minutes spent Googling your stocks to see how they’re adapting could save your portfolio.
Remember, it’s not just about taking part in gains — it’s about avoiding losses.
Technology is changing … the world is changing … is your portfolio changing?
Have a good evening,
Jeff Remsburg
