Friday, February 12, 2016

The melting ice cubes of previously good businesses...

Some more great comments from Seth Klarman, this time about the disruptive forces of technology:
While operating within the constraints of value investing principles, we are determined to look far and wide for opportunity, building our competencies over time based on learning and experience. We must neither be confined by a narrow mindset of what may or may not be undervalued, nor become so aggressive in pursuing opportunity that we deviate far beyond our circles of competence. I tell our team that we wouldn’t be doing our jobs if we remained locked in the past, buying only the melting ice cubes of previously good businesses now in decline as though technological change weren’t accelerating the obsolescence of entire industries. We would also be remiss if we failed to take advantage of new analytical tools and resources. We must consider new ways of thinking. We must continuously ask ourselves whether any investment under consideration is just too hard to properly assess: Is the fruit too high-hanging? In investing, there are no style points awarded for degree of difficulty. However, the complexity and opacity that may cause others to discard potential opportunities as “too hard” can drive market inefficiencies that result in opportunity for us. In 2015, we took a close look at “big data” technology as a research tool and potential “edge” for Baupost. While there are a number of applications that may be interesting over time, we continue to strongly believe that our investment success will ultimately depend not so much on big data as on big judgment. 
... Disruptive forces continue to roll across the global business landscape. Unprecedented changes are taking place as technology advances and entrepreneurs drive creative destruction. Numerous industries, including the behemoth energy, pharmaceutical, automobile, and retailing sectors, are experiencing waves of increased competition and disruption. In many cases, the new competitors simply have a better business model. Andreessen Horowitz co-founder Marc Andreessen has said that “we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures.” Certainly, no investor can blithely assume that what has heretofore been regarded as a “good business” will automatically retain its pre-eminence and, for some, even viable existence.