Think Blue Chips Are Safe? Here’s Why They Aren’t

By Alex Pollak | More Articles by Alex Pollak

“In 2015, Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba the most valuable retailer has no inventory and Airbnb, the world’s largest accommodation provider, owns no real estate.” 

Tom Goodwin, Havas Worldwide

It wasn’t that long ago that mobile phones or even the internet didn’t exist. It and wasn’t that long ago that Nokia did, Eastman Kodak and Digital Equipment Corporation did, in the sense of being top 100 companies.

Google’s Ray Kurzweil, who holds the title of Director of Engineering but is also one of the group’s most respected thinkers, explains the rate of change with the following simple example: If you take 30 linear steps, you travel 30 metres. If you take 30 steps exponentially, you travel over billion metres.

Fifty years earlier, the American futurist Buckminster Fuller created the “Knowledge Doubling Curve” showing that until 1900 human knowledge doubled approximately 100 years.

The Washington Post produced an excellent infographic which showed something similar to this for the period up to 2007. It says, in effect, that the entire volume of information storage capacity, both analog (books, movies, languages, cave paintings etc) and digital in 1986 was 2.64 billion gigabytes. It doubled around 9 times in the thirty years to 2007 (compared with the 100 years previous doublings took.)

Authors Peter H. Diamandis and Steven Kotler, in their book Abundance, take it one step further. They said by 2010, it was doubling every two days. IBM, among others, say it will soon double every twelve hours.

When does all this knowledge, most of which is not in machine language and so not operable by machines, become data which is understandable by machines. And when does all this data, which goes into machines, turn back into knowledge that is actually useable? And when does it become investable?

The answer to this question about investability seems to be: “already”. Blue chip companies are failing at an alarming rate, being replaced by network companies with new paths to profitability, and they are running rings around the blue chips.

In fact, it is now possible to think of the information networks which run on the internet as a piece of the puzzle which wasn’t there before, but which make things go better. Interestingly, we had not necessarily even been aware it was missing, meaning that companies made engines, and that was that. But knowing when the engine would stop functioning, because of a piece of kit connected to a network that told you how many hours it had left completely changes the equation.

Transportation will still mean planes, trains and automobiles, retailers will retail, banks will move money around and there will be no agriculture without crops. But the knowledge networks made possible by the internet have changed the way we manage these assets. There may be ten taxis within a block of us, but unless they reliably know our location and trust the payment system we won’t get a ride. We need to be able to control them, and the internet does that.

By using this knowledge (that is now turning into machine language on the internet) we can change the underlying industries, improving their economics so much that it isn’t viable to contemplate an asset operating without the information network to direct it. Is a single taxi, or even a small network of taxis, competitive with Uber, which can deliver a whole fleet within minutes, in many places around the world? Is it this network connection that makes Uber investable (or its absence the thing that makes an unconnected taxi company uninvestable?)

It’s not just trivial things like a taxi-rides. If the data were available from agriculture in the form of soil types, climate conditions, crop yields and prices at the farm gate, efficiently and globally shared, it may be that the crop failures which are a part of food production could be reduced, even significantly.

There is enough evidence to suggest that the creation of the network itself, irrespective of the underlying assets, has significant value. Now, how to pick the right companies.

This is an excerpt from the essay “Retirement, Investment and Blue-chips: What you really must understand”. To read the full essay, click here.

Alex Pollak

About Alex Pollak

Alex Pollak is CEO of Loftus Peak, a fund manager that specialises in building listed global investment portfolios of disruptive businesses for self-managed super funds. Alex was instrumental in bringing both Seek Ltd and Carsales.com.au to the Australian stock market.

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