A strategy many investors have employed in the past was to buy and hold shares in a company. If the company went through a tough period, new management would be brought in to fix issues and the company would then continue to grow. Can this strategy still work when industries are facing disruption or even extinction in the face of major technological advancements?
Today, we are in the third industrial revolution due to new developments in communication, energy and transport technology - the three key areas that drive economies.
Learning from history
Let’s take a step back and review what drove the first two industrial revolutions, both of which brought massive waves of growth and prosperity, while also ceasing entire industries. The first industrial revolution was led by Britain, which rolled out telegraph lines, started using coal as a new energy source and then put it to use in steam-powered trains.
The second industrial revolution was led by the United States (US), which laid telephone lines/electricity infrastructure en masse and used oil as a new energy source, allowing Henry Ford to move the population from horse and carts to cars, busses and trucks.
Moving forward to today, there is no doubt the internet has changed the way we communicate. For example, Facebook has more than 2.3 billion monthly users and about half of those are daily users. You might have come across this article on Facebook, or received it by email as part of our newsletter, both of which are common forms of internet communication.
There are indications that renewable energy will soon cost the same as, or be cheaper than, fossil fuels. Improvements in technology and mainstream adoption of renewables will likely drive the cost of energy down in the future.
The third area, driverless/automated vehicles, is still under development. However, Google’s self-driving vehicle business, Waymo, already has a fleet of driverless cars operating on the streets of Phoenix and recently launched a small scale commercial taxi service using them.
What does this all mean?
There will be disruptions to many established businesses and industries, especially those in the direct line of fire such as retailers, and fossil fuel, and logistics companies.
Myer is an example of a company operating within an industry that has already been disrupted. Myer shares listed on the Australian stock market in 2009 at $4.10 and reached lows of around $0.35 10 years later in 2019, a fall of more than 91%. What happened?
In the past, Myer succeeded by occupying a large store footprint in a central location and carried a broad range of products. Popularity of online retailers has risen over the past decade largely due to cost – an online retailer only has to pay a sliver of the rent and staff wages that Myer does and this is reflected in a cheaper product price. Myer’s whole business model is being disrupted by the internet and there is little management can do to address it.
This revolution is not all doom and gloom – there will be many opportunities for new and existing businesses as well. Think about those companies that could be operating at near zero communication, energy and/or transport costs in the future. This would enhance investor returns, which is good news for people looking for investment growth opportunities. New industries will emerge as well, again presenting investment options to consider.
You only have to look at the largest share market in the world, the US, to see changes in the top companies from 2008 to 2018, as shown in the table below. During this period, 50% of companies fell out of the top 10, so there would have been considerable opportunity cost had you bought and held the winners in 2008 for the following decade.
||Proctor & Gamble
||Johnson & Johnson
||Johnson & Johnson
||Bank of America
*Companies highlighted in green represent new entrants to the list.
There is also an opportunity cost of limiting your portfolio to only one investment sector, such as Australian shares. Had you invested $100 in the Australian share market back in 2008, your investment would have been worth around $186 in 2018. That same $100 invested in the US share market would have been worth $342. This can be attributed to the Australian share market being dominated by traditional and established banking and mining companies, whereas the US market is focused on information technology companies that are disrupting traditional businesses worldwide and growing accordingly.
Doing what you’ve always done might not work in the future as we experience the third industrial revolution. To learn more about expanding your portfolio to protect against the changing industry, get in touch with a BDO Private Wealth Adviser.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.
The financial product advice or information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.