Category Archives: Growth Investing

Disruptive Innovation Equals Growth

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Innovation is the key to growth.

In the late nineteenth century, three innovation technologies evolved at the same time and changed the way the world worked and its paradigm. Thanks to the introduction of the telephone, automobile, and electricity, the world’s productivity exploded as costs dropped, unleashing demand across the globe.

Today, the global economy is undergoing the largest technological transformation and displacement in history thanks to disruptive innovations.

ARK defines ‘‘disruptive innovation’’ as “the introduction of a technologically enabled product or service that changes an industry landscape by creating simplicity and accessibility while driving down costs.”

Innovation meets three criteria

“Over time, innovation should displace industry incumbents, increase efficiencies, and gain majority market share, offering growth opportunities for investors. More importantly, disruptive innovation impacts and concerns all of our lives and changes the way the world works.” Cathie Wood, Founder, CEO & CIO, ARK Investment Management LLC

According to ARK Investment Management, disruptive innovation will:

  • Experience significant cost declines and unleash waves of incremental demand. When a technology crosses certain cost or performance thresholds, its addressable market can widen and diversify dramatically.
  • Cut across sectors and geographies. A technology that cuts across industries and geographies can enjoy dramatic increases in addressable markets as applications are “discovered” by different business sectors. Spanning across sectors also provides better product-market fits, insulates against business cycle risk, and garners attention from multiple disciplines.
  • Serve as a platform atop which additional innovations can be built. A technology upon which other innovations can be built may expand its use-cases in ways that are almost impossible to imagine. As a result, innovation platforms may be underestimated over expansive time horizons because successful forecasts require anticipation of the scope of new products and services.

Today’s disruptive innovations include:

  • Artificial Intelligence
  • Robotics and Automation
  • Blockchain and Cryptoassets
  • DNA Sequencing and Gene Editing
  • Fintech Innovation
  • Energy Storage and Battery Tech
  • Next Generation Internet

For example, artificial intelligence (AI)  learning systems will transform not only retail, media and telecom, as did the Internet, but all sectors in the economy, even those previously thought impervious to disruption, notably health care and financial services.

Invest in the future

Disruptive innovation displaces industry incumbents (like digital photography has erased Kodak and Fuji film companies), increase efficiencies, and gain majority market share.

The threat to existing businesses is grave. The long-term opportunities for companies participating in this change could relate to exponential growth.

References:

  1. https://ark-invest.com/investment-process/
  2. https://research.ark-invest.com/hubfs/1_Download_Files_ARK-Invest/Marketing_Material/ARK-Invest-Thematic-Investment-Process.pdf?__hstc=13933160.99f789dd545191653572e5ece0571091.1584118328216.1587939706096.1587954906355.105&__hssc=13933160.8.1587954906355&__hsfp=101573855
  3. https://ark-invest.com/invest-in-innovation/

Growth vs. Value

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“Empirical evidence suggests that value stocks outperform over the long term, even if growth has out performed value in recent years.” Bankrate

Recently, growth stocks, such as Microsoft, Amazon, Tesla and Apple, have handily outperformed value names. But it’s not always that way, and many seasoned investors think value will once again have its day, though they have been waiting on that day for more than a decade.

The difference between the two approaches are:

  • “Growth investors look for $100 stocks that could be worth $200 in a few years if the company continues to grow quickly. As such, the success of their investment relies on the expansion of the company and the market continuing to value growth stocks at a premium valuation, as measured by a P/E ratio maybe, in later years if the company continues to succeed.”
  • “Value investors look for $50 stocks that are actually worth $100 today, not in a few years, if the company continues its business plan. These investors are typically buying stocks that are out of favor now and therefore have a low valuation. They’re betting on the market’s opinion changing to become more favorable, pushing up the stock price.”

“Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return,” says Wes Crill, senior researcher at Dimensional Fund Advisors in Austin, Texas. “That’s one of the most fundamental tenets of investing.”

Growth investing and value investing differ in other key ways, too, as detailed in the table below.

Many of America’s most famous investors are value investors, including Warren Buffett, Charlie Munger and Ben Graham. Still, plenty of very wealthy individuals own growth stocks, including Amazon’s founder Jeff Bezos and hedge fund billionaire Bill Ackman, and even Buffett has shifted his approach to become more growth “at a reasonable price” oriented as of late.

Yet, sometime in the future, and unfortunately no one can forecast when, it appears guaranteed that value will outperform growths as an investment for a long period of time.

Typical investing wisdom might say that “when the markets are greedy, growth investors win and when they are fearful, value investors win,” says Blair Silverberg, CEO of Capital, a funding company for early-stage firms based in New York City.

If you’re an individual retail investor, it is wise to stick to fundamental investing principles or otherwise consider buying a solid index fund, such as the S&P 500 that takes a lot of the risk out of investing.

References:

  1. https://www.bankrate.com/investing/growth-investing-vs-value-investing/