Fifth Era/Blockchain Coinvestors Update #19
In 2010 we noticed that Apple had joined Microsoft as one of two west coast based technology companies on the list of the world's most valuable companies - a significant change since for the prior few years only Microsoft had been able to hold its place as once high flyers like Cisco and Intel dropped off. The rankings still showed the legacy of the ‘Industrial Era’ all too clearly, but technology-based companies were starting to climb up the rankings again.
2010 World's Largest Companies by Market Cap
PetroChina ($329 bn)
Exxon ($316 bn)
Microsoft ($256 bn)
ICBC ($246 bn)
Apple ($213 bn)
BHP Billiton ($209 bn)
Wal-Mart ($209 bn)
Berkshire Hathaway ($200 bn)
General Electric ($194 bn)
China Mobile ($193 bn)
We had both spent decades as partners at top management consulting firms serving established large companies in legacy financial services, technology, consumer products, and other industries. After we moved to the Bay Area in the mid 1990s, we increasingly served new technology clients like Amazon, Cisco, eBay, Google, HP, Microsoft and many others. We also became active early-stage technology investors and began to get good exposure to the explosion of technology startups in the Silicon Valley ecosystem. It was in 2010 looking at these rankings and seeing the incredible growth trajectory of many new technology companies that we first started to believe that the tailwinds behind new technologies were irreversible and that - over the next few decades - more and more of the most valuable companies in the world would be leaders in innovation based on new technologies.
By then we were writing and speaking a lot about the importance of new technologies and the innovation economy. We would often ask our audiences to “guess who the world's most valuable companies are?" Even by 2015, very few people got it right, mostly assuming the energy, banking, and industrial companies of the past were still dominating the rankings. When we put up the slide, it was a surprise to most. The three most valuable companies in the world were all west coast based technology companies!
2015 World's Largest Companies by Market Cap
Apple ($621 bn)
Google ($408 bn)
Microsoft ($347 bn)
Berkshire Hathaway ($318 bn)
Exxon Mobile ($304 bn)
Johnson & Johnson ($257 bn)
General Electric ($248 bn)
China Mobile ($243 bn)
Novartis($240 bn)
Nestle ($233 bn)
We wondered what Benjamin Graham - the great author of the world’s top selling book on investing “The Intelligent Investor” - would have made of this? Graham’s book was written in 1949 and still outsells other books as an authority on the science and discipline of investing. In 1949 public technology companies were mostly poor performers, and Graham thought so little of the sector that he relegated his discussion of it to one page in a final Appendix 7 where he concludes "The phenomenal success of IBM and a few other companies is bound to produce a spate of public offerings of new issues in the fields, for which large losses are virtually guaranteed." That's it! In 600 pages, that is all he had to say about investing in technology companies.
No wonder then that the greatest proponents of Benjamin Graham and value investing - Warren Buffet and Charlie Munger - have singularly and repeatedly emphasized their lack of support for technology investing. Even though they have excelled at investing in traditional companies, and Berkshire Hathaway holds a high ranking among the world's most valuable companies, technology investing is just not their thing. Ironically, Buffet broke with this long held view in 2016 to buy into Apple and today Apple has powered an incredible portion of the performance of an otherwise sclerotic Berkshire Hathaway (For the last decade, their value investing strategy has underperformed the S&P 500 even with the inclusion of Apple).
However, returning to Benjamin Graham, he was first and foremost an empiricist. So what would he make of this data from July 2020?:
2020 World's Largest Companies by Market Cap
Apple ($1,576 bn)
Microsoft ($1,551 bn)
Amazon.com ($1,432 bn)
Alphabet ($980 bn)
Facebook ($676 bn)
Tencent ($620 bn)
Alibaba ($579 bn)
Berkshire Hathaway ($433 bn)
Visa ($413 bn)
Johnson & Johnson ($370 bn)
We think “The Intelligent Investor 2020” would be a very different book. If Benjamin Graham was doing his work today, instead of segmenting industry verticals into "value" versus "laggard" stocks, he would have no option but to see that most of the market value of the last decade has been created by companies built on innovation and new technologies. Benjamin Graham would have won by just dividing the public market into two parts and investing in the one that contained technology based companies. We believe traditional forms of corporate valuation based on long term discounted cash flow models can lead to blind spots and myopia in the current context. For example, most of the value in DCF models is in the terminal value, and when industries and markets are changing and being disrupted so quickly, we question the value of assuming a stable growth rate in perpetuity for any company in any industry. The venture capital industry and early stage technology investors are much closer to understanding how to value and invest in the high growth technology and innovation sector than traditional finance theory. We believe it is time for a new book on intelligent investing as practiced by Silicon Valley.
This is the core thesis of several books we have written about corporate innovation, early stage technology investing and new technologies. We invite you to click on the link and download a free copy of our opening book, 'The Fifth Era'. And feel free to share the link with your family, friends and colleagues.
We believe we are transitioning from the Industrial Era into a new Fifth Era in which a global digital world will transform everything humans do. Those companies that leverage new technologies to create new business models and customer offerings and build strong innovation muscle and capabilities will create enormous market value and those that don’t will flounder. We are living in unprecedented times in which technology and innovation are the leitmotifs of our lives and power our global economy and the human experience.
Whilst none of us expected the terrible and worldwide pandemic that has afflicted the globe this year causing tragic loss of life and loss of livelihoods, it has only served to accelerate the adoption of new technologies by governments, businesses and consumers alike.
For us that is the clear silver lining in 2020.
It's a great time to be a technology investor.
Thank you for reading this!
Alison Davis
Matthew C. Le Merle