Investor’s column: Investing in the age of disruption

Eastman Kodak was one of the world’s most admired companies in 1996. Although Kodak invented the digital camera, its market dominance in film blinded the company to the disruptive technology that it had created.

By 2012, Kodak had filed for bankruptcy and in that same year, a 2-year-old digital photography company called Instagram with 13 employees sold for $1 billion.

This is a familiar story as the internet has brought us many examples of disruptive technologies: Tower Records is replaced by Itunes, Borders Books by Amazon and Blockbuster by Netflix, to name a few.

Indeed, we have just scratched the surface of disruptive technologies.

Scott Cook, a co-founder of Intuit, says we’re still in the first minutes of the first day of the Internet Revolution. The Wall Street Journal has called this the fourth industrial revolution, also known as the age of disruption.

The basis for all of this change goes back to Moore’s Law, named for Gordon Moore of Intel in 1965. He stated that every two years, computer processors were exponentially shrinking in size, doubling in power and dropping in price.

To better understand the power of exponential improvement, think of doubling a penny every day so that on Day 2 you had 2 pennies, Day 3 you had 4 pennies and so on.

By Day 15 you would have $163 – not bad – but then by Day 20 you would have more than $5,000 and by Day 30 you would have more than $5 million.

Exponential change can take some time in the beginning years until the pace of change becomes explosive. In similar fashion, Albert Einstein considered compound interest the eighth wonder of the world.

Enhanced computing power and technology innovation has created a world of information flow that according to IBM, during the past two years, we’ve created nine times as much data as we had produced in the entire history of the world before that. This surge of information has helped to create new technologies that will greatly change the way we live.

The Internet of Things

Our devices speak to each other in service to us without our input – think of Alexa and home automation as just the beginning of things to come.

In 2016, Alexa was released to the public capable of handling 115 tasks. Today it can handle more than 15,000 functions. In seven years, Siri will know more about me than my assistant.

A 2013 report by Cisco predicted that the Internet of Things will add $14 trillion to the global economy by 2025.

While innovations have the potential to greatly improve global economic growth, there will be many companies that fail to make the transition.

• A 2015 Fortune magazine survey of Fortune 500 company CEO’s asked their greatest challenge: 72 percent said the rapid pace of technological innovation.
• According to Richard Foster of Yale, in 1920, the average company in the Standard & Poors 500 lasted 67 years. Today it is only 15 years.
• According to Babson College in a 2011 article, in 10 years, 40 percent of the companies in the S&P 500 will not exist.

How do we protect ourselves to both benefit from the coming storm and minimize our exposure to the casualties? Start by understanding what you own and ask why you own it.

How does an asset fit in your overall financial planning needs analysis? Develop risk management policies that review holdings for structural business characteristics that will allow them time to generated excess economic returns for an extended period.

Look for patents, switching costs, cost benefits and other sustainable advantages that will provide a buffer to adapt and potentially acquire new competitors. Pay attention to valuations and avoid herd mentality.

Adaptability and risk management will be key attributes.

This story was originally published November 20, 2017 at 10:13 AM with the headline "Investor’s column: Investing in the age of disruption."