This article was first published in the National Post on December 4, 2021. It is being republished with permission.
by Tom Bradley
There’s never been a period in my career when so much change and disruption was happening at one time. It’s a challenge keeping up with the trends and the exponential nature of change today.
Maturing technologies are rolling through the economy while the pandemic and bull market act as change agents, providing urgency and boundless amounts of capital.
With so much happening, it’s important to differentiate between the trends that are just getting started and those that are fading, as well as the ones that are COVID19-induced flash in the pans.
Early-day trends
Many trends are in the first or second inning. They’re just starting to ramp up and displace the status quo. Cathie Wood of Ark Investment Management talks about Wright’s Law, which states that for every cumulative doubling of units produced, costs will fall by a constant percentage. Costs come down and usage skyrockets.
Wright’s Law is playing out as we start a multi-decade shift from fossil fuels to more sustainable forms of energy. The cost of wind and solar is dropping below conventional sources and is now garnering most of the new investment capital.
There’s no turning back on electric vehicles given the billions of dollars being spent on battery technology and retooling plants. Neither will there be a reversal for digital currencies. Bitcoin is getting all the attention, but expect the central banks to play a bigger role in a more regulated future.
Artificial intelligence is already embedded in so many things we do, but it’s just getting rolling (whether you like it or not). And the list of drivers for innovation in health care is too long to print. What we’ve seen during COVID-19 is the tip of the iceberg.
You get the picture. There’s lots going on. Unfortunately, the certainty of these trends doesn’t make them any easier to invest in. As you get on the bandwagon, there are many questions to answer: How fast and profitable will the growth be? Who will benefit the most? What price do you put on potential?
Diversification has never been more important.
The undeniables
There are two big-picture trends entering the frame. First, taxes on investment portfolios and corporations, particularly the multinational giants, are going up. It’s just a matter of how far and how fast.
And, second, the baby boomers are creaking towards their 80s and the impact will be significant: less consumption, more health care and different housing needs. The boomers have had a profound impact on society at every stage of their lives and the next one will be no different (pickleball, anyone?).
Still have legs
There are well-established trends that still have plenty of growth ahead. Cloud computing fits the bill, as does online retail. Even though online sales over the Thanksgiving weekend in the United States were down this year, most companies’ sales are growing faster on the web than at the mall.
Industry consolidation has been a big driver of stock market returns for three decades. It’s getting tougher for the mega firms to buy or merge (ask CN Rail and CP Rail), but many industries remain highly fragmented with the largest players having a small market share. Rolling-up industries will continue to be a key strategy for corporations and private-equity firms.
The final innings
It’s a dangerous time for investors when growth companies mature. As sales plateau and market share gets harder to come by, stock valuations decline. These companies may continue to grow (albeit at a slower pace) and yet their stock prices will fall, or do nothing for an extended period.
This pattern played out after the tech boom of the late 1990s when companies continued to do well, but not well enough to offset their shrinking price-to-earnings multiples.
Nobody rings a bell when maturity strikes, which makes it hard to say whether industries such as streaming, ridesharing and anything working-from-home related have peaked. It appears working out at home has hit the wall if Peloton's stock price is any indication.
Some highly touted trends may not even be trends at all, but rather cyclical upturns. The democratization of investing (trading apps, no commissions, Reddit) is likely to prove highly cyclical as the appetite for options and day trading ebb and flow with the stock market. Zoom, food delivery, golf and even inflation may also end up in the cyclical category.
It’s not easy determining the nature of any trend, but we know one thing for sure: it’s an exciting time so enjoy the ride.
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.