This week we look at an increasingly pressing theme that is shaping out to be the most decisive for our collective futures. This is a thematic that will not only affect the way we invest but also the lives we live. Arguably one of the most important facets of investing is to try and take a step back from time to time from the tactical to the more strategic and big picture. Here we refer to the broader macroeconomic and sociological forces that underpin everything we do and, let's face it, the companies we invest in.
And so although we agree in principle with Charlie Munger’s notion of ‘focus’ when it comes to assessing portfolios we should also be cognizant of ‘bounded rationality’. In other words, our acute tendency to make suboptimal decisions based on limited resources and cognitive limitations. We would, therefore, contest that every investment manager must sometimes step back and question not only their assumptions but to try and grapple with the bigger picture.
It is with this logic in mind that we would like to discuss a somewhat pressing theme that is shaping out to be the most decisive for our collective futures. This is the proliferation of big data and technologies predicated on understanding human behaviour and modalities.
In her prescient essay written in 2014, Harvard scholar Shoshana Zuboff described a fundamental evolution in the capitalist structure, what she referred to as “surveillance capitalism”. This new mode of accumulation is described as the commodification of reality and analysis of behavioural data for profit. Consider, for example, your medical data taken in conjunction with your social profile. Imagine these diverse data points ranging from how often you eat out to what sporting groups you are a part of and imagine the utility of these datasets to an insurance company. And of course the ultimate Nirvana of artificial and predictive intelligence where companies are able to predict with ever greater certainty the significant events in your life before you do (from when you are likely to have your first child to your likelihood of getting diabetes or arthritis). Whilse the implications of this have huge positive potential, the way in which economies adapt to them and the policies that we adopt will have a major role to play in how these businesses evolve.
Think this is a bit of hyper-reality? Consider this, I was recently listening to an interview by Dr Pippa Malmgren, for those of you who don’t know her, she served as an adviser under the Bush administration on Financial Services as well as being the daughter of another Harald Malmgren who had served in several advisory roles under four Presidents. In the interview (see here), she refers to the way in which the US intelligence services found out about a very secretive cyber command in Hong Kong by tracing the side-leakage from a mobile device of an employee. Since he stopped at the same Starbucks every morning they were able to assess the number of steps he took before reaching his desk to launch a cyber attack.
Now contextualise for yourself the digital footprint you leave, even those of us who don’t necessarily have a technological bend. So what does all this mean for investment decisions and how is it going to impact us, the little investor on the street?
Firstly, the fact that even rumours of Amazon launching into a new industry sends the markets into a frenzy is a telling sign of the sheer impact and competitive advantage that data-driven companies have when it comes to market penetration. Amazon, we would argue, is a data company and not a retailer. In fact, the most interesting aspect of this business (despite the fact that we don’t own it given its valuation) is the Web Services platform and the sheer size of their data network. You might not know it, but we can just about guarantee that even if you’ve never used Amazon, some portion of the data about your life is warehoused there. For example, NAB announced that it was moving some of its core banking systems onto the Amazon cloud last year. Similarly, Microsoft Azure is another big player when it comes to data storage for the Australian government including departments ranging from Defence to Immigration.
Secondly, and perhaps in the shorter term, it puts a whole new context behind why governments act the way they do when it comes to the likes of Huawei and the combative attitude between the United States and China. Though trade is a significant aspect of it, we would argue that control over Industry 4.0 as it is called is the bigger question. For nation states, it is not just a question of fairness or equity when it comes to intellectual property, the question of data and predictive intelligence is far more wide-ranging and goes to the very survival of economies. Take defense for example, in an age where Kinetic Weapons, capable of travelling at Mach 10 speeds and satellite controlled are a reality, most conventional defense systems would find it next to impossible to defend against a potential missile strike. The only alternative in this instance is control of communications systems and predictive intelligence that can give certainty over enemy positions and the behavioural patterns of the people handling the systems in the first place.
Similarly, the Cambridge Analytica scandal during the US elections and the Chinese government's newly unveiled social credit system is a telling sign of where things are headed. Governments and companies are placing ever greater investments in expanding an ecosystem and new moats are created in the form of what we like to refer to as data harvests. In this new system, we have to be able quantify things differently, traditional metrics of free cash flows or profit margins don't work. Ever wondered why Facebook would want to pay 19 Billion USD for Whatsapp? For a product that made hardly any money, this hefty sum seemed ludicrous to many. Think again. By 2014 Whatsapp had approximately 450 million users. Think of the utility this would have for a company whose platform is something that most modern users cannot live without. The platforms and ecosystems that develop around these companies are the moats of the new age as brand recognition or secret recipes were for Coca Cola. This is the reason Apple wants to make it harder for the iOS system to compliment others (its platform and network is its moat). Once you have built out a sufficient network and made it sufficiently harder for others to replicate this ecosystem, then you can start to do even more interesting things.
Now we look at the most valuable AI startup in the world, a company you’ve probably never heard off by the name of SenseTime, valued at US$6 Billion. The company’s entire technology is predicated on understanding the emotional state of people i.e. behavioural intelligence. Its technology has the capacity to assess crowds as large as 10,000 and ramping up to 100,000 taking into account everything from facial expressions to behavioural patterns. It currently partners with the likes of Tencent, Alibaba (who invested 600 Million into it), Baidu, Nvidia, Huawei, Wanda, UnionPay, to name a few. The ability to access large sets of data about people and to connect and run through that data can have implications from Retail to Healthcare. Imagine if, as a business owner, you could know everything about a person or your customer base with certainty (including who is likely to be your most profitable). As an investor, imagine if you could have access to metadata on how the markets are feeling and have some way to cleanse the countless datasets that make themselves available from your potential investment targets, customers to their competitors and suppliers.
This is the world we live in. A world in which the most valuable currency is no longer fiat paper but data. Where information is traded as easily as commodities and your ability to make sense of it is the difference between success and failure. Valuing companies should have an additional dimension added to it we would say, namely their ability to collect this valuable commodity.
This is not to say that we should dispense with reality altogether and cash flows or the income statement disappear from the equation. The dot-com bubble showed us the futility of this quite painfully. We are saying that we should be a little more nuanced and aware of what the implications of this new trajectory are.
Every generation there comes a time in which we have tremendous shifts that fundamentally change the ways in which we live our lives, what Kuhn might refer to as the paradigm shift and what Taleb might call the black swan. Mass production offered this during the time of Ford and the railroads offered the same in the century before that. They created huge opportunities but also left a wake of dislocation as collateral, creating the robber barons of the late 18th Century and destroying entire industries in their wake (while creating new ones).
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.