Applying The Long Wave in the Age of Disruptors – What Does This Mean for Stock Picking?

In the early 1920s, Russian Economist Nikolai Kondratiev developed the concept of the long wave when applying technological change to traditional economic cycles. He observed that these periods of long waves can range from forty to sixty years and consist of alternating intervals between high sectoral growth and intervals of relatively slow growth. There is much disagreement among economists how these long waves affect economic growth and when.  There is, however, no disagreement that the bunching of in many cases several innovations at a time, can launch profound socioeconomic change.  See chart below:

Chart source:  Wikipedia

When applying the concept of the long wave to stock picking, it is important for today’s portfolio managers to stay abreast of technological change. One needs to identify who future agents of change will be. Today we call these forces disruptors. These are often companies that take rapid market share in sectors that did not exist before. Forbes magazine recently published a list of the most valuable companies at 50 year intervals in its recent 100th Anniversary edition (see chart). It is a stark reminder that investors need to, identify long waves and their potential disruptive effects but, and perhaps more importantly anticipate the timing of these changes before they become obvious. A case in point is Kodak in the 1990s: It was already losing market share to other competitors before it was obvious that digital photography would kill its business.

Ten Most Highly Valued Companies

The list illustrates the changing leadership from wave to wave.  Among today’s most valuable companies, like Microsoft, Amazon and Facebook we can continue to point to strong long-wave dynamics based on cloud computing, the rapid adoption internet commerce, and the growth of social media. But we need to stay vigilant.

What will be the disruptors of the future?

Together with my partners at C.J. Lawrence, we constantly try to analyze sectors where we can identify characteristics of new long waves forming. Currently we are spending a lot of time on the healthcare sector to understand what the rapid decline in cost of human genome sequencing will have on healthcare.  Genomics company Illumina claimed on its Q3-quarterly earnings call recently that the price of sequencing a single human genome will decline to $100 as a result of its new Novaseq sequencing system. The effects of this are profound. What used to cost millions just a few years ago, now costs a fraction.

Chart Source: DNAnexus, April 24, 2017

Much like the effects which were observed by Gordon Moore in processing power of semiconductors and the spread and democratization of computing power, we believe low cost human genome testing will spur a revolution in how we think about and deliver healthcare in the future. One area where we are already seeing direct applications of the genomics revolution is in NIPT (Non-Invasive Prenatal Testing). Today, insurance companies cover 150 million patients to receive this important, non-invasive test to determine the health of the baby in the early stages of the pregnancy.  Other important breakthroughs are already being applied to prevent and cure certain tumor cells. Stay tuned, there is a lot more to come!

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