Put down your crystal ball

Smartphones help illustrate why megatrends and crystal balls are of little use to investors.

You've just been told the future. (Play along for a moment, there will be a point to this).

Imagine in 2008 you know that, in 10 years' time, 1.5bn smart phones will be sold to create one of the biggest and most profitable industries in the world. What do you do?

In 2008 the iPhone is basic and it's not obvious what it will become. Incumbent phone makers Blackberry, Samsung and Nokia have far more advantages than Apple in phone manufacturing and promise to mimic many of the iPhone's acclaimed features.

You know that smartphones will be huge. Yet what you don't know is more important; you don't know who will benefit.

If you backed the incumbents and invested in Nokia or Blackberry - perhaps the most sensible course of action - you would have lost everything.

Alternatively, you might have purchased a parts manufacturer or supplier to the industry, thinking they'd grow along with the market regardless of which brand ended up dominating. Not a great outcome here, either.

Shallow pool

From the US$130bn in revenue generated from iPhones, Apple and a dozen chip suppliers capture 90% of the profits.

The businesses that make and supply the nuts and bolts of the phone itself - the screen, the camera, the assembly - share just 10% of the profits. This is despite them having to invest huge sums in the factories that make the devices as well as billions in working capital.

Crystal balls aren't as valuable as many imagine and they aren't particularly rare. There are plenty of trends that are easy to identify and close to inevitable.

We all know electric cars are coming, that the population is aging, that the Chinese middle class is growing, that renewable energy is becoming increasingly abundant, and that artificial intelligence will eventually be ubiquitous. These things are near certainties. Yet how useful is this knowledge?

Just like knowledge about the smartphone's success in 2008, identification of a megatrend isn't valuable without some insight into which part of the value chain will capture the surplus.

Lazy tools

Everyone thinks so much about the profit pool yet they ignore the more important question: how will those profits be distributed?

Is investing in lithium miners a sensible response to knowledge that electric cars are coming? Is it reasonable to assume retirement villages will be more profitable in a world with more old folks? I doubt it.

If there is one lesson that the iPhone and the stupendous success of smartphones teaches us it's that demand doesn't equal profit. Megatrends, crystal balls and soothsaying are shields for the lazy investor. They distort more than they reveal.


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