A world of 1's and 0's
What words are there to describe 2020 that hasn't already been exhausted? We all know it was a cholesterol-raising, stressful and complex year. So instead of rehashing what was, I want to focus on what will be. Artificial intelligence (predictive analysis), machine (deep) learning, cloud computing, and neural networks will underpin colossal growth in the global economy over the next 10-20 years. Andy Jassy’s appointment as CEO of Amazon is a testament to how vital these developments will be to enterprises worldwide. The first line of Microsoft's most recent earnings release reads, "What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry. Building their own digital capacity is the new currency driving every organization's resilience and growth". According to ServiceNow, 2020 saw digital transformation spending accelerated despite GDP declining globally. Digital investments are at an all-time high and are expected to continue growing. To put the opportunity in perspective, IDC estimates that worldwide spending on digital transformation will exceed $7 trillion by 2024. The global AI market is projected to grow at a 42% compounded annual growth rate between 2020-2027.1
Ark-Invest has written insightful research into the upside of AI and Deep Learning and the impact it could have on markets. By their estimates, the internet created $13 trillion in equity market capitalization over the past two decades. They forecast Deep Learning will add $30 trillion to global equity market caps over the next 15-20 years!2 AI will impact every vertical from Finance to Automotive to Healthcare to Aerospace to many, many others. I genuinely believe it is the revolutionary element of the digital era we are embarking upon.
But Wait… There's More!
Not only are enterprises going digital, but so is cash. Currency is also undergoing an analog-to-digital transformation. As institutions look to adopt crypto strategies, think Tesla buying $1.5bb of Bitcoin or MicroStrategy converting their corporate treasury cash into Bitcoin, so too are governments. China has already completed the backend infrastructure for its digital currency called DCEP (Digital Currency Electronic Payment) and plans to soon begin beta testing its use in four cities. In the US, big banks' further disintermediation could occur if the Fed adopts digital currency on the blockchain. Currently, consumers do not have direct access to the Fed; our banks do. What if that were to change? After all, billions of people have smart phones, thus providing them with the ability to download digital wallets on their phone. In a speech given by Lorretta Mester, president of the Federal Reserve Bank of Cleveland, she discussed that very idea; "Legislation has proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Bank which could be used for emergency payments."3 To take it a step further, paying taxes or receiving refunds would be easier, getting money to small business would be more efficient, and person to person transfers would be a viable use case.
Companies will also drive this change. Square has been a KDM holding for years. Square and PayPal served as distribution mechanisms for PPP aid to citizens early on in the Pandemic.
A long-running bear thesis against Square had been that it wasn’t as robust as PayPal because it began by providing hardware products to start-up brick and mortar businesses. But that argument is spurious. I never considered the investment to be a 'Square (CashApp) vs. PayPal (Venmo)' scenario. I have always envisioned the fintech disruption to be aimed at taking share from traditional banks. I see it as Square and PayPal, and other disrupters vs. JP Morgan, Bank of America, Wells Fargo, et al. The big banks have trillions of assets. The fintech names have fractions of that amount. Yet PayPal added 73mm active users in 2020 and has 373mm total active users globally!4 These companies are replacing physical currency and changing how we interact with our finances in ways that traditional banking institutions have been unable to. The platforms are attractive because they are building out social + finance. Their content creation aims to engage users emotionally and cognitively. Those interactions are then intertwined with transactions. This type of social + finance platform becomes very powerful when the interactions and transactions become mutually reinforcing. The flywheel becomes supercharged. If you believe that cash will become a relic as I do, and digital wallets will become the preferred method of handling our finances, then the long tail of digital currency disruption is only beginning to challenge and forever change the traditional banking infrastructure.
The Most Important Thing….
Undoubtedly, a confluence of factors has created a moment by which investing in organizations at the vanguard of global digitization can return outsized gains.
But as we all know, making outsized returns is not easy! Not only do you have to buy right, but you need to hold on. Usually the 'holding on' is the more difficult of the two. In a world of texting, zooming, tik-toking, and tweeting (activities that incite instant responses), holding on to an investment for years is becoming exceedingly difficult, especially when many algorithmic funds are trading in milliseconds. Having an investment horizon of more than a few weeks may be antiquated to many. Some will even declare that long term investing is dead. But I believe the opposite. Being long term is an edge. The adage 'be right and sit tight' is as applicable now as it ever was. As a stock owner, we are part owners in real businesses, with real people trying to figure things out with tangible assets and real goals of changing the world. Long term ownership of assets is a deterrent to making mistakes. My objective is to 'maximize my rightness'. But that takes time. And a strong stomach. Big winners do not go straight up and often undertake nauseating paths to success. But if done right, investing should be boring. Daily stock movements are mirages that tempt us from our path. The desire to make a quick profit is perhaps the most considerable hindrance to making outsized returns. But the more active one is, the more difficult the game becomes. I am assiduously reminding myself not to take investment actions for non-investment reasons. To be patient. As Thomas Phelps wrote in '100 to 1', "In the stock market, evidence suggests one who buys right must stand still in order to run fast."
The trends we are investing in are multi-year, multi-decade themes. They offer tremendous opportunities for financial gain. It will not be easy, nor quick. But inevitable.
We just need to 'Be right and sit tight.'
Regards,
Andre McClure
KDM Capital