Change, Structural vs Cyclical: Which matters most?

The flaws of “cyclical thinking”

One of the easiest ways to find advantaged companies is simple: look at how the world is changing structurally and get on the right side of that change. It’s how I’ve approached investing my entire career and it matters to the results. If you want a strong investment outcome, you’d better understand the difference between structural and cyclical.

I’m sure you’ve all heard the ‘Growth’ vs ‘Value’ debates. It’s not the first time those arguments have occurred. In the early 1990s there were several publicly listed companies that made fax machines. They had been growth stocks but were depressed. The narrative at the time was that these growth stocks were underperforming because the “Value” style was popular, but when this dynamic mean reverted and went the other way, you’d make a lot of money owning these “Growth” fax machine companies. The problem was that those companies were depressed because email was on the rise…a significant structural change in how information was sent around the globe. All of those companies went bankrupt. 

The same narrative about ‘Growth’/’Value’ mean reversion is in the market today, but many of the underlying changes I see are structural. It’s important to recognize that the argument of ‘Growth’/’Value’ mean reversion is a cyclical argument based on a cyclical idea. Better make sure the underlying phenomena is cyclical. 

Right now, as back then, it is not. This is critical to get right, because cyclical change separates the world into growth and value and those things do mean revert. However, structural change? That separates the world into winners and losers, and the losers usually don’t mean revert…they go bankrupt. As I said, better get it right. 

So here are the structural growth themes I see today that I expect to be invested in for the at least the next several years:

  • Ecommerce: Ecommerce proved to be a better business model than bricks and mortar retailing two decades ago, around the globe, and never looked back. Convenience, selection, price discovery…it’s better on virtually every metric. It’s been taking share of total commerce for a long time but it’s still early days. We’re only about 15-20% penetrated even now and it’s not going to stop regardless of COVID. There is much value to be created still. Many of the long-term winners are already obvious.
  • The Electronification of Money: It’s been ongoing for several decades right in front of you…credit cards were invented in the 1950s and have been increasing in use all along the way. Even today we are only 50% penetrated in the US and far less globally. Now with the accelerated rise of ecommerce, paying digitally via credit cards or other online payment methods becomes not only necessary but tremendously convenient for both buyer and seller. Couple that with the new COVID-driven awareness of money being “dirty”, and the use of digital forms of payment becomes an easy choice.
  • The Move to the Cloud: The shift toward cloud-based tools and services is one of the most exciting structural changes of my career. It is a fundamentally better way to organize technology and conduct business. It provides the flexibility necessary to work remotely with full access to corporate services and full productivity without compromising security. It started long before you ever heard of COVID and will continue stronger than before. Prior to COVID-19, it was considered a “nice to have.” It is now considered essential. As one CEO recently told me, “If I don’t get to the cloud like yesterday, I don’t have a business tomorrow.” I see this as a once-in-a-generation type shift that is changing the way every company on the planet does business. Not many things do that.
  • Diagnostics and Drug Research: This has been advancing for some time but several breakthroughs in science and technology have increased the rate at which diagnostics can be developed and research can be conducted. It’s driving significant value creation in certain parts of the health care and life sciences value chain and will continue for many years to come. 

All of these trends have a long way to go and are creating significant value for the right companies. We focus our investments in these areas of structural change because its where significant compounding begins. It also makes short-term considerations irrelevant. 

We spend all of our time identifying the globally leading companies and making sure we own enough of them to matter for our clients. Our process is completely focused on earning superior returns for our shareholders in a sensible, repeatable way balancing risk with reward over long periods of time.

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