Complacency the enemy of investors

On the Contrary

While many people dread Sundays because they are just that much closer to beginning a new work week, I’ve come to enjoy them as we have a family tradition of afternoon drives to explore strange new places.

While these drives haven’t changed much for me over the years other than moving from the back seat into the driver’s seat, they might very well change for my kids: Just last week Tesla announced that all of its electric cars will now have the hardware to allow autonomous-driving, and released an amazing video of its technology in action.

We certainly live in very interesting times with plenty of exciting innovations such as driverless cars, electric cars, renewable energy sources such as solar and wind power, 3D printing, virtual reality, drones, crowdfunding, blockchain and chatbots.

However, many of these innovations will not become true disruptive forces until they dramatically reduce the price of the good or service in their particular industry. For example, solar and wind power still cannot compete without government subsidies against lower-cost energy sources such as natural gas, while the current Tesla electric cars for the most part are still too expensive for the average consumer to displace cheaper gasoline cars.

Looking back, a great example of this is the invention of the automobile, which despite its innovations did not disrupt the horse-drawn carriage for its first 30 years. This was because its steep price made it a luxurious toy that only the rich could afford.

Then Henry Ford came along.

Ford ’s innovations in automobile construction, in which parts and assemblies were brought to a main assembly line on a precise schedule led to massive gains in productivity.

According to the Henry Ford Heritage Foundation, Ford cut the production time on a full chassis from more than 12 hours to about an hour and a half and at its peak, one Model T left the factory every 24 seconds. That’s fast even by the standards of some of today’s auto assembly plants.

As a result of these massive gains in productivity, Mr. Ford took the price of a new Model T down from $850 in 1908 to a low of $260 by 1927, finally making it affordable for the average consumer.

The difference today is that it no longer takes 30 years for an innovation to become disruptive. Take for example the roll out of Airbnb and its impact on the hotel industry; Uber’s low-cost ride sharing, which will soon make city controlled highcost taxis obsolete; Amazon’s online business, which is threatening higher cost bigbox retailers such as Best Buy; and streaming services such as Spotify and Netflix, which are making CDs and DVDs a thing of the past.

In the financial industry, there are plenty of examples of disruption such as the attack on the high cost, underperforming mutual fund industry by ultra-low-cost exchange traded funds (ETFs). The rollout of low-cost “robo advisers” is also just beginning to become a threatening force.

The biggest risk for investors in all of this is to become complacent, like those companies who refuse to change despite facing new innovative threats or worse, disruptive forces that are already in play.

As a result, market share is eroded along with the overall value of the company, which can turn into a valuetrap for the unsuspecting investor.

The winners in all of this will be those who cautiously embrace the change by becoming low-cost manufacturers of the goods or services being offered, rather than fighting it.

Perhaps in the end those Sunday drives will become all the more enjoyable with a computer behind the wheel — now, if only there were a disruptive technology for siblings fighting in the back seat.