Weekend Reads for Investors: Disruption, Damodaran, and Dalio
Growing tensions in Iraq may have temporarily dampened the mood of equity investors over the past week, but as we approach the year’s midpoint, most major stock markets remain near record highs. The IPO market, typically a good barometer of investor sentiment, remains robust and suggests that investors’ animal spirits have not abated. According to Renaissance Capital, new issues are up 83% globally over the past year, driven by strength in the US market, where more than half of the IPOs have been in the technology and health care sectors. Over the past half century, few sectors of the economy have matched the innovation seen in the areas of technology and health care, so it should come as no surprise that this is where the capital is flowing.
Since Tesla’s (TSLA) debut in 2010, the watchword for the IPO market has been “disruption,” and some variant of the term seems to be incorporated into the pitch books for virtually all new issues today, whether deserved or not. As a result, it has become clichéd. True disruption is upending an industry, not just building a better mousetrap. Of course, disruptive technologies and practices are nothing new — Ford (F) introduced the assembly line in 1913 — but the mere suggestion of disruption now seems to induce a Pavlovian response on the part of investors whereby accepted principles of valuation are suspended and a speculative fever takes hold. While the level of speculation in the IPO market may not yet approach that seen in 1999, it bears close watching.
The theory of disruptive innovation was conceived by Harvard professor Clayton Christensen and made popular by his 1995 article (with coauthor Joseph Bower), “Disruptive Technologies: Catching the Wave,” and later by his book, The Innovator’s Dilemma. Christensen describes disruptive innovation as “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.“
Earlier this week, Christensen’s work was critically challenged in an article by his Harvard colleague Jill Lepore. In The Disruption Machine, Lepore wrote, “Disruptive innovation is a theory about why businesses fail. It’s not more than that. It doesn’t explain change. . . . It makes a very poor prophet.” In response, Christensen called Lepore’s article “a criminal act of dishonesty.” It’s an entertaining debate worth following.
Below are some other stories that caught my eye in recent weeks.
- Exploiting bad investment behavior. (Forbes)
- Morningstar’s John Rekenthaler makes the case for high-volatility stocks. (Morningstar)
- AQR’s Cliff Asness on why he loves high-speed trading. (Bloomberg)
- Investment Management: A Science to Teach or an Art to Learn? (CFA Institute Research Foundation)
- Peter Schiff warns of the bond trap. (Euro Pacific Capital)
- The best investment advice of all time in pictures. (Forbes)
- Aswath Damodaran on the interplay between narratives and numbers that makes for a good valuation. (Musings on Markets)
- Andrew Smithers has a two-part piece on the problem with using the cyclically-adjusted P/E (CAPE) for non-US markets: Part 1 and Part 2. (Financial Times)
- Lance Roberts defends Shiller’s CAPE and suggests an alternative measure. (Streettalk Live)
- Hank Paulson on the coming “climate crash.” (The New York Times)
- In case you missed it, CFA Institute just hosted an online forum on ESG Issues in Investing. (Enterprising Investor)
- Walmart fact checks The New York Times. (Walmart)
- A rare peek inside Amazon’s massive wish-fulfilling machine. (Wired)
- Ray Dalio, Steve Schwarzman, and Bernie Madoff are among the industry’s most impactful individuals of the past five years. (Chief Investment Officer)
- “The Next Generation of Shareholder Activists” (IR Magazine)
The World Cup
- “The Braess Paradox In Soccer — How A Team Can Be Better Without Its Best Scorer” (Mind Your Decisions)
- “The World Cup Flopping Rankings” (The Wall Street Journal)
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
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