Technology and Investing
Updated: Oct 15, 2020
Joe Ricketts begins his memoir describing the day he saw his father, a stoic home builder, display some excitement as he observed his employees use a new machine he had just acquired - that was in the 40s, in the small Nebraska City. Joe went on to found and grow
Ameritrade into a giant discount broker and then into a leading investment services platform, through sheer grit and foresight.
Joe had humble origins and no education in technology, not to mention his ingrained Nebraskan “cheap” mindset. Nevertheless he went out of his comfort zone investing in computers to automate his back office in the 70s, way before most peers, who would be left behind as the industry consolidated amid a few scale players, a process that has, by the way,
just culminated in the merger of Charles Schwab and Ameritrade.
I could use other examples, like Netflix’s Reed Hasting making the shift to streaming, but the point is already clear: technology is paramount in business. Those who do not evolve are left behind. The same can be said of those who overlook broader societal and cultural changes.
What does it mean for those of us managing clients’ assets, investing in stocks, and using judgment to try to outperform the market?
In our business, the most important piece of equipment is our brain, which we must strive to
constantly equip with the latest tools, concepts,and information so that it can evolve rather than be left behind.
Warren Buffett is widely known for being a “value” investor, picking assets on the cheap. But that is a tremendous understatement. He could not have achieved a tenth of what he did by just buying “one dollar for fifty cents”, the market is not inefficient enough for that to be
possible at scale or sustainably.
Warren likes to tout his investment in American Express in 1963 as “simply” exploiting the
salad - oil scandal; the reality is far from that. It was a highly insightful investment looking into the future. Though lowered by the scandal, he still paid a rich price of 20x 1964’s earnings of US$12MM, which came mainly from Traveler Checks, a 73 - year old business that was showing signals of weaknesses, according to the company’s “biography” by Peter Grossman. But Buffett was looking forward, buying into a nascent credit card business, which Amex had launched just five years before (losing $15MM until 1961). The credit card was a major technological and behavioral breakthrough in financial services, was growing exponentially, and would account for more than half of Amex’s profits as soon as 1968.
Moreover, we can see that Buffett hasn’t quit updating his brain even in his 80s, as he decided to go for a big and successful investment in Apple, and has reportedly being at least trying to understand the dynamics of cloud computing.
The fact that growth stocks have far outpaced value ones over the past ten years has been widely reported and debated. But for me, it is not value versus growth. Anyone reasonably literate with financial analysis can recognize value in growth. The problem is that prudent investors cannot buy the future without understanding it at least nearly as well as they understand (by more simply and effortlessly observing) the present, and many fail to equip their brains to be able to reach conclusions about the future that are solid enough to responsibly place good bets. Joe Ricketts went out of his comfort zone by buying a computer, enabling his firm to do well in the future. We, professional investors, ought to do the same, spend time, money and energy understanding technological, behavioral, and societal advancements.
The business world just will not stand still. Those who ignored cloud computing or digital
media fifteen years ago were left either behind or holding dying businesses. I guess those who overlook artificial intelligence, evolutions in batteries, lab - based protein, or remote work, for example, maybe in a similar position a decade or two from now.
I must caution, nonetheless, that I am not arguing that to excel in capital allocation one needs
to be a PhD in these fields at the frontier of technology. Neither one needs to cover each one of these fronts. In investing, avoiding mistakes and placing a few, sporadic convex bets is enough for long term success.
How deeply one needs to go into the inner workings of the technology a given company or
industry uses varies a lot, depending on how nascent the business is, how is the competitive
environment and so forth. In addition, technology alone rarely sustains aprofitable business;
moats do, which, in Buffett’s Amex case was in the power of the brand, as well as on network effects.
In our case, we often find our greatest ideas in companies innovating technologically, surfing
macro tendencies in society, and with deep moats, besides being leaders in their fields, with predictable business models that generate substantial free cash flows. One obvious example is Amazon, but Paypal and WIX also fit the bill.
To close, I would like to acknowledge my colleagues and the “growth - mindset” environment at Tarpon, for pushing and helping me on this endless pursuit of knowledge. We must never rest. Joe Ricketts was never at easy; he decided to venture into the fledgling discount broker industry as he foresaw it would one day hamper his then job as a conventional broker, while most of his peers dismissed the idea...
Tarpon U.S. Equities
May 31, 2020