Disruptive Innovations
Pfäffikon SZ, Switzerland – The ink of my last article on the exultation of the Dutch gas profits had not yet dried when the Dutch party D’66 announced their innovation gas fund. According to the D’66 democrats this gas fund should allow for renewal of small and medium business as well as strengthen fundamental scientific research. This, of course, sounds too good to be true, but in any case it’s a lot better than wasting the gas profits on exorbitantly expensive leftish hobbies.
Magic Word
Innovation is seen by many as the magic word, with which to alleave the current financial malaise. Personally, I have a more refined opinion on the matter. There is no doubt that innovation is important, but as long as our crazy financial system (and mindset) – which is based on acquiring excessive debt in Europe – doesn’t change, a sustainable economic recovery will remain elusive. The president of the Nederlandsche Bank (The Dutch Bank) – Klaas Knot – is entirely correct when he calls the current situation regarding the Dutch underwater mortgages “pretty eerie”. In Switzerland I have observed that homeowners have been somewhat reined in. I believe this is a sensible development. A potential buyer in the neutral mountain state is required to have significant financial clout.
Deflationary Suction
That innovation can have far-reaching consequences is perhaps less well known among the general audience. The clearest example is the internet, that to this day displays a gigantic deflationary suction. Moreover I note that research from “Verkenningsinstituut Nieuwe Technologie” (VINT) (Observation Institute for New Technology) from IT-provider Sogeti shows that the expiration date of stock listings in the future will plummet to an average of 5 years. The turnover rate of businesses listed on the Dutch AEX has declined by 25% every 10 years since 1993. In 2023 the average duration of a listing will drop to 25 years and in 2033 a business would only survive 5 years on the trading floor “if the trend continues”.
Turnover Rate
As a cause for the higher turnover rate VINT mentions the faster and disruptive innovations. These are technological developments that stay under the radar for a long time and then suddenly see the light of day as they pop up in different places. In doing so they disrupt the existing markets with all the resulting consequences. Someone else that focuses on radical innovations is the Dutchman Yuri van Geest. Last year, in the Amsterdam Carré, Van Geest organised a stage for Peter Diamandis, founder of Singularity University. According to Van Geest, Diamandis is one of the 15 most influential people in the world. Diamandis agrees that the lifecycle of existing businesses is under pressure. The classic way of innovating is dead because startups are sprouting up like mushrooms around the world.
Expiration Date
The business model of a business – and its valuation – is for us Value Investors the most important starting point. But we also monitor the expiration date of business models on a daily basis. Moreover we recognize the power of innovation. I find Google to be one of the best examples of how innovation should be shaped in today’s market. Van Geest shares this opinion. Google gives shape to their innovation power outside the mother company. This way a possible culture shift is easier to realize. This increases the success rate at Google, which is apparent in practice.
Benefit of the Doubt
The innovation-initiative from Mr. Pechtold of D’66 and his supporters deserves the benefit of the doubt. I believe innovation should be financed by the private sector and never by the government, and most certainly not through gas profits. For the government induces laziness and our offspring will need this gas at a later point in time. Moreover, D’66 should realize that today’s voters could be presented with the bill for a radical innovation policy further down the road. Aggressive innovation can be very disruptive.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has position in Google and no position in the other above shares and has no intention of doing so in the next 72 hours.
