One of an investor’s most important assets is his network, both social and professional.
Today’s article was inspired by a line of thinking triggered by my old mate Nige. He is one of those rare creatures who makes a living as a professional investor of his own funds and usually has an out-of-the box view of the world, or some new wacky macro trend he is researching.
Last month, he attended a short conference on change and change leadership. The guest speaker was a futurist known as Craig Rispin, who writes for the Switzer Super Report, and who talked specifically about the speed with which mobile technology was being adopted worldwide. Out of seven billion people, more than six billion have a mobile phone, fewer than that have a toilet. The average American teenager sends over 3700 texts per month (no wonder they don’t talk). There are now over five billion mobile phone apps in the world and the growth remains enormous. Did you know that one smart phone possesses more than 4,000 times the computing power of the computers that NASA used to put men on the moon?
The world is changing rapidly and investors need to appreciate these changes and what they can do for and to a business.
Getting faster all the time
In the last year, the darling of the PC era, Intel, the company that built the engine for so many millions of PCs around the world, found itself on the wrong side of a monstrous trend. Its share price has plummeted and the market is speculating (no doubt a little early) of its demise for missing the mobile phone trend. Apparently, our smart phones don’t possess Intel chips.
The speed with which change is occurring is amazing and as investors, we try to deploy capital in order to capitalise on these tail winds and not swim against them. One of the difficulties facing all of us is that most companies capitalising on and often creating this momentum are not listed, and high profile structurally-challenged dinosaurs like Fairfax, Newscorp, Ten network, PMP and many more, are listed. At the event, Nige met representatives from a mobile phone app creator who had experienced extraordinary growth, and he asked them about potentially listing their business. Their response was simple, “we are a growing business, we will list when we are ex growth and are looking for an exit”. Of course, not all listed companies are mature and ex growth, but the pressure in the listed environment to provide short-term earnings, share price appreciation and regular dividends, coupled with the stringent compliance structure, makes it an unattractive place for many entrepreneurs. The majority of professional investors has little patience and rarely allocates capital with more than a six-month horizon. The open-ended fund, coupled with an obsession with quarterly investment returns, creates a structural challenge for investors when trying to make long-term investment decisions that may require patience.
That’s one of the reasons why I have built up a funds management business that uses Listed Investment Companies (LICs). LICs are a closed end pool of capital. When investing, they can therefore take a medium- to long-term view that, over time, leads to superior returns for their investors. The Listed Investment Company removes much of this pressure.
ASX an old age home?
Nige posed the question: is the ASX (as dominated by the larger stocks) an old age home for companies? Old, arthritic, long on experience, but suffering from inertia and just shadows of their former vibrant entrepreneurial selves? Is the stock market just a place where good companies are sent when their best days are behind them?
He suggested that when considering a company for investment, a thorough understanding should be sought of how that company manages change. How does it foster a culture of innovation and risk taking and encourage evolution and development? Who leads this drive, and are the board and shareholders supportive of the need to take risks in order to future proof the organization? Well, at least try. Not every manager may be as good as Jack Welch, but the entrepreneurial culture fostered under his leadership led to new businesses and divisions that helped create one of the world’s biggest and most successful companies in GE. How many of our large cap ASX stocks actively encourage innovation?
Learn from mistakes
Failure is a great teacher and the demise of Fairfax is a classic example of how a dominant company, with a seemingly insurmountable moat around it, can collapse so quickly. The attitude by the board in the 1990s towards the internet was denial. Indeed, the chairman made it quite clear he didn’t want to hear any discussion around the potential loss of the classified-fuelled rivers of gold. This was a company uniquely positioned to capitalise on the internet. Instead, the board denied it. In the early 2000s, they tried to reinvest thousands but it was too late. Contrast this with what News Corporation, under the leadership of Rupert Murdoch, has achieved. Rupert became Managing Director of News Corp in 1952, when its major asset was a newspaper the Adelaide News.
Major change is with us; ignore it at your peril. We make change leadership an important subject of discussion with any company we consider investing in.
As a suggestion, look at a company’s website on your phone…do they possess a smart phone friendly website? If not, why not? An enormous amount of web browsing today is done from a smart phone….and it’s not just teenagers. The PC is history and the market risks going from an old age home to a graveyard if its constituents don’t embrace change and future proof themselves.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.