September 2014

“Money is like manure. You have to spread it around or it smells.”

- J. Paul Getty

A little over 100 years ago, manure helped change America.  Cities were growing fast, and horses were ubiquitous. Not coincidentally, the “manure problem” was making downtown areas rather odious.  Civic leaders were eager for cleaner streets and the automobile was hailed has the perfect environmental solution.  Private firms built the cars and the public sector built the roads.  Nothing would ever be the same.

In Germany, inventor Karl Benz invented the Benz Patent-Motorwagen in 1886.  In 1890, Armand Peugeot began producing cars with Daimler engines and so laid the foundation for the French automobile industry. In Detroit, USA, the innovative Ford Model T was introduced in 1908.  “You can have it in any color as long as it’s black,” said Henry Ford on his new vehicle, a car build for “the great multitude.”   To this day, their companies are still thriving; today Ford, Mercedes-Benz (Daimler AG), and Peugeot employ a combined 654,207 employees.

Of course, some sectors suffered amidst this innovation.  Those poor souls in saddle, shoeing, and carriage businesses were not happy with this transformative change.  Jobs were lost and lives disrupted.  But, the technological leaps that were occurring in manufacturing, transportation, and communication would not be denied.  These leaps created a huge shift in commodity values as well----soon the hay in the fields became worth much less than the oil under those fields.

Today, the pace of technological change and process improvement (read more competitive) is stunning.  Artificial Intelligence (AI), 3D printing, robotics, and a host of other technological advances are displacing jobs, disrupting lives, and making many people very uncomfortable with an unknown cyber-future.  “Where will the new jobs come from?” is the question many ask.  Can the social fabric hold amidst the technology revolution?

And, at the core of all this, is something most of us only vaguely understand—“THE CLOUD.”  The technology revolution is being driven to warp speed by process improvement, data mining and data storage.  Every day, “Big Data” is directly touching each of our lives in many areas, whether we know it or not. 

Technological leaps have given rise to the relatively new ability to customize huge amounts of information on each of us.  The cloud’s virtually unlimited data capabilities mean the current “revolution” is just beginning.  And make no mistake; it is as revolutionary as America’s industrial revolution 100-150 years ago, it is just not as tangible.

And while we can debate the merits and perils of this reality, no matter where you stand, it is clear that business models will change.  Those that embrace and invest in cloud-based technology will advance more successfully than those that look the other way.

At Talbot Financial, we recognize that revolutions are never smooth.  On the whole, however, we are optimistic—especially about America’s prospects in this environment.  Many nations/ cultures make every effort to “shelter” certain constituencies that can’t keep up.  Yet the winners in the coming decades will be those societies that help their citizens adjust to the new technologies—and embrace the opportunities therein.  America is on this difficult road.

For example, for those depending on a job in the retail industry there is both pain and opportunity.  For every job not created at a traditional retailer, another is being created at a firm like Amazon where a click of mouse is turned into product on your doorstop.  In addition, many of the best retailers have robust and emerging technology solutions and applications to gain both customers and sales….and it’s much more complex than just having a slick website. “Big Data” is about knowing more information about your customer by 10x than you ever knew about them before.

Even the world’s largest retailer, Wal-Mart, is morphing its online/mobile/web-based strategies.  Simultaneously, it is building smaller, more community sensitive stores—which will double as mini distribution centers.  Companies like Home Depot, and Macy’s are using Apple’s iBeacon technology to track customers who walk in the aisles of their stores and alert shoppers to deals when they walk in.

We believe that many malls will transform and emerge very successfully over the coming years.  Those that succeed will feel more like the “city squares” of old— yet offering modern and multiple entertainment and dining experiences.  They will feature more boutiques, kiosks, and showrooms—showrooms that really serve as ordering & pick-up locations (see Tesla as an example of this).  In many cases, mall-stores will be primarily service centers for the massive number of products sold via mobile devices and the Internet.

Perhaps surprisingly, the benefits of technology and the cloud will not only accrue to large companies—the nimble at any size can win.   Utilizing technology for everything from booking tables, to food ordering, to understanding customer flows will significantly increase the profitability of the “small guy.”  That could mean the return of the family restaurant concept that faded for decades against corporate competition.  Embracing the innovation will be the differentiator.  When in history has small business been able to reach millions instantly? 

Intel’s Andy Grove once quipped, “Only the paranoid survive,” and watching the evolution of the phone supports his assertion.  Nokia dominated mobile phones in the 1990’s, but saw them only as phones.  Blackberry had its day in the sun, pushing security and keyboards, as they saw the potential for the phone as a business tool, but they didn’t see what Steve Jobs saw.  Of course we know Microsoft whiffed on mobile, and it wasn’t long before Apple eclipsed all the competition and now the iPhone is attempting to replace both the wallet and the watch.  Or is it the watch taking share from the tablet or phablet?  Regardless, through this process, jobs will be gained and lost….fortunes will be made and destroyed.   New winners will emerge— and those that miss a turn will head to the locker room.   

And while in past blogs we have mentioned the manufacturing and energy renaissance as central to America’s resurgence, the fact is without the technology and cloud advances, energy and manufacturing in America would not have come so far so fast.   Add in the trifecta of America’s entrepreneurial culture, available business capital and relatively free and open markets and globally the US has a decided advantage.  And keeping in mind the pace of change, it is not hard to see why the technology revolution that began decades ago is actually accelerating—and not “getting long in the tooth” as some suggest.

Now remaking an economy the size and scale of the US is a little like tuning a car—with the engine running.  There will be fits and starts.  Plus, there will also always be the political temptation to tinker too much (read too much taxation and regulation) with a system that is naturally adjusting.  All of this (and much more) will be reflected in the market---particularly in the short run.  Clearly the world has changed when a tweet from someone in Ukraine can send the Dow up or down 100 points in a matter of seconds.

Still, as investing legend Benjamin Graham said, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”  Over time, the fads will come and go, but those companies embracing investment in leading edge technology—and offering competitive products accompanied by strong leadership teams and solid balance sheets will “weigh” more than those who fail to join the revolution.  Those “wait-and-watch” firms will, in essence be offering—well, manure.

Happy Investing! 



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