August 19, 2020
We invest in disruptions. Disruptions are induced either by innovation or by technology, whereupon a better, cheaper, faster way of doing things arises. When this foundational change occurs, there is a long-term secular shift to the new ways of doing things.
A quick example of a disruption in today’s economy is the move from traditional banking to mobile banking and digital currency. My mom still goes to a bank and cashes checks, while my son just takes pictures of checks and uses Venmo to send money to his friends. Between 2010 and 2019, the number of full-service bank branches in the United States fell from nearly 95,000 to about 83,000 (source: FDIC). Get ready – we think as many as half of them may go away over the next 10 to 15 years because no one young goes into a bank anymore. It’s incredible. We have been carrying paper and coins in our pockets for the past 3,000 years and we are the last generation to do it. What a disruption!
One of the great attributes of taking a long-term approach and investing in these multidecade disruptions is that they are typically not derailed by major macro shifts. Not to make light of these issues, but it doesn’t matter whether there is a pandemic, or who gets elected next, or whether there is a trade war. My son is not going back to the bank, because he has found a better, cheaper, faster way of doing things
That said, the pandemic has had an effect on the disruptions we invest in, but it has been a positive one. Specifically, many of the innovations we have been invested in for years have been accelerated rather than pushed out. One broad example of this is the digitalization of consumer and business activity. Consumers are changing habits in some major ways. Instead of shopping, more people are using ecommerce. Instead of going to the doctor, more people are using virtual healthcare. Instead of going to the bank, people are using mobile financial services and digital currency. Don’t expect people to go back to the old ways of doing things. Productivity gains will crystallize the changes they have made to how they work and live.
As you can see, dramatic new efficiencies are being realized as a secular shift continues toward better ways of doing things. This is the creative destruction process in action that makes capitalism so great. We expect this process to continue and accelerate as our understanding of the coronavirus and its economic impacts improves. You see, risk assets love more visibility. This is not to say there are not still significant issues regarding the pandemic. Rather, it is our understanding that has improved and that allows more decisions to be made, from Main Street to the boardroom.
We believe a new economic cycle has begun, and we believe the economy will grow at generationally high levels of more than 5% gross domestic product (GDP) growth in 2021 and 2022. Also, with a vaccine on the way, we think most of the pandemic’s impact will be behind us a year from now. Our belief is that you want to own equities early in the economic cycle. In the current cycle, that could mean before everyone is vaccinated.
Finally, we believe arguments about valuations being too high are misguided, as sell-side estimates are too low for next year. Many of the digital trends that we have reviewed add to productivity and improve efficiencies and business models. This could mean earnings can improve to a much greater extent as labor-saving solutions are implemented. So, our optimism shows no signs of cracking. We are excited about what lies ahead for the economy and for society as a whole.