How one of the greatest investors of all time has fallen into the ranks of “average” — thanks to the Technochasm
Warren Buffett is the latest victim of the Technochasm.
Here is one of the greatest investors ever to walk the planet, seemingly having met his match, not from a bear market …
But from technology.
It’s just another illustration of the “haves” versus “have nots” division that’s exploding investment markets, and our world in general.
***For any newer Digest readers, let me back up and provide a bit of context so we’re all on the same page
Eric Fry is our global macro specialist and the analyst behind Fry’s Investment Report. He also happens to be a veteran investor with decades of experience and one of the best long-term track-records in the investment newsletter industry.
In recent months, Eric has been studying and writing about a phenomenon he’s named the “Technochasm.”
The term references the widening wealth gap that’s taking place thanks in large part to huge investment gains coming from select, technology investments.
On one hand, cutting-edge tech products are simplifying our lives, making them far more convenient. This is why Americans are happy to open their wallets for tech — and this means most Americans, even those who aren’t necessarily earning high incomes.
On the other hand, this is a huge wealth transfer — from the masses … to a select group of technology business owners, key employees, and investors …
It’s creating a sharp wealth divide — in the socioeconomics of our society, as well as in the stock market.
Eric’s most recent issue of Investment Report digs into the Technochasm, highlighting the divergence in fortunes between Warren Buffett and Amazon-founder, Jeff Bezos.
It’s a fascinating illustration of how the Technochasm is creating division even at the highest income levels.
***A tale of two billionaires
When we think of Buffett and Bezos, most of us simply think “obscenely wealthy.”
But if we dig into the details of that wealth, and the diverging directions of each fortune, it tells an interesting story …
It turns out the $145 billion stock-market wealth of Amazon-founder Jeff Bezos is now double Warren Buffett’s $77 billion.
Here’s Eric for more:
Just a few years ago, Bezos was a relative pauper compared to Buffett. In 2014, Bezos’ Amazon holdings were worth $25 billion, while Buffett’s Berkshire Hathaway holdings were worth three times as much.
Six years later, Buffett’s stock market wealth has barely budged, while Bezos’s wealth has increased sixfold.
Now, a few caveats before we dig into the “why?” behind these fates.
Eric tells us that Buffett’s continuous stock selling over recent years explains part of the reason why his wealth has been going sideways. If he still owned the same number of shares as six years ago, his net worth would be about $20 billion higher.
However, we could make a similar adjustment for Bezos. Were it not for his divorce last year, he would be about $50 billion richer.
While that’s an edge for Bezos, let’s just call it even and turn to the more interesting part of this — their divergent investment holdings.
***The big picture explanation for the growing wealth divide between Bezos and Buffett
So, what’s really behind Bezos’ exploding wealth and Buffett’s stagnating wealth?
Here’s Eric:
The vast and widening divide between technology-powered industries and everything else is responsible for this divergence.
Amazon’s business has grown at a breakneck pace for the last several years, while most of the largest holdings in the Berkshire Hathaway portfolio have plodded along at low single-digit growth rates.
As you can see in the nearby chart, Amazon’s revenues have been soaring 28% per year, on average, over the last five years, while none of Berkshire’s top 11 holdings has produced even low double-digit growth.
As a group, these 11 stocks have managed to eke out average five-year revenue growth of just 2.2% per year. And three of the 11 have produced no revenue growth whatsoever, as their five-year revenues have fallen.
That’s a tough way to produce investment success.
***Eric tells us that if you dig into Buffett’s holdings, you’ll see a portfolio packed with iconic, but slow-growing, American companies with their glory years in the rearview mirror
To illustrate, Eric points toward Buffett’s financial stocks — Wells Fargo, American Express, JPMorgan Chase, and Bank of America.
As a group, these stocks have been meandering higher at 5% annual growth rates.
Back to Eric:
That’s not a disaster, but it pales alongside the growth rates of leading financial technology — “fintech” — companies like PayPal Holdings Inc. (PYPL), Square Inc. (SQ), Fiserv Inc. (FISV), and PagSeguro Digital Ltd. (PAGS).
When looking at potential investments through the lens of the Technochasm, it is easy to see whether a company is dynamic and growing … or merely occupying space, hanging around and waiting to die.
***Let’s move away from Buffett and Bezos, and look at other stark illustrations of the Technochasm impacting the market
Let’s start by trying to isolate the returns of an “average” S&P 500 stock. We’ll do that by looking at the S&P Equal-Weight Index.
Unlike the normal S&P 500 Index, which gives more weight to the largest companies (which are all tech companies), the equal-weight index gives equal representation to every company. Given this, it’s a more accurate estimation of how the average stock in the S&P is performing.
So, let’s begin to pull back the curtain on “tech vs non-tech” by evaluating the S&P Equal-Weight index against IXT, which is the S&P Technology Select Sector Index.
As you can see below, over the last three years, the average equal-weight S&P stock has climbed less than 10%.
Meanwhile, the average technology stock has return eight-times that amount, or 79%, to be exact …
Specialized niches in tech are doing even better.
To illustrate, look at the performance of IGV; it’s the iShares Tech-Software sector ETF.
Below, you can see it’s up 97% over the last three years. That’s basically 10-times the gains of the average equal-weight S&P stock.
“But we’ve been having a huge bull market up until the Coronavirus. How can the average equal-weight S&P stock-return be so underwhelming?”
Because the average equal-weight S&P stock isn’t a tech stock. It’s that simple.
By the way, just for fun, here’s Buffet’s Berkshire Hathaway stock thrown into the mix.
At just a 5% return in three years, it has underperformed even the average equal-weight S&P stock.
Now, to be fair, Buffett has had years of underperformance before which were followed by years of outperformance. That’s because Buffett remains faithful to his market approach, which is that of a value investor. And during different market seasons “value” does better and worse.
But for now, what we can say — simply by looking at his holdings and returns — is that Buffett is on the wrong side of the Technochasm.
***Where are you invested today?
For months, Eric has been urging readers to give their portfolios exposure to elite tech stocks.
But aligning your portfolio with tech is only part of what’s required today — there’s also a need to play defense.
In other words, investors need to perform a ruthless cross-examination of all the stocks in their portfolios. After all, though technology creates wondrous new industries, it destroys archaic old ones … that might have been at the forefront of innovation at one point in time.
Back to Eric:
Many great American success stories later become infamous American failure stories because they failed to innovate. As a result, they shuffled off into irrelevance and bankruptcy.
That ignominious list of companies would include names like:
In a recent update, Eric warned subscribers about the ticking time bombs in so many people’s portfolios due to bad business structures … heavy debt loads … and completely outdated business models that are being disrupted by fast-moving and creative, technological startups.
Back to Eric:
If you own doomed firms like these you are all but guaranteed to miss out on the biggest gains of the years to come.
The reality?
Warren Buffett has owned these “yesterday” stocks, and his portfolio has missed out on years’ worth of tremendous wealth-creation from tech.
If your portfolio has suffered the same fate, you can change that …
Looking forward, can you think of any reason why tech won’t continue to dominate? Can you think of any reason why its supremacy won’t actually accelerate as new technologies impact our world?
If you’re ready to align your portfolio alongside Technochasm-winners and want to see the steps Eric is taking, click here.
I’ll wrap up with words I never thought I’d be typing …
Are you sure you want to be like Buffett?
Have a good evening,
Jeff Remsburg
