Disrupted

  By Guest Blogger Doug Rowat

I’m not a fan of golf and don’t play; it’s one of the few Bay Street investment advisor clichés that I’ve actually managed to avoid. However, I’ve still heard of the 13th hole at the Augusta National Golf Club in Georgia, which is widely considered one of golf’s best and most challenging holes to play. It’s a 510-yard par-5 with a green that isn’t even visible for the first 270 yards.

However, because of advances in golf club and golf ball technology, particularly in recent years, it’s now become a lot less challenging. In fact, according to Sports Illustrated, the 13th hole at Augusta played as the easiest at the 2017 Masters. PGA Tour players now drive the ball an average of more than 295 yards, five more yards than just three years ago, so going for the green in two has become straightforward.

In other words, an iconic golf hole has been completely ‘disrupted’ by improving technology.

Disruptive technology, of course, doesn’t just affect the PGA Tour, it also regularly affects the stock market. A few examples:

Nokia was once the world’s largest and hippest cellphone manufacturer—Nokia phones were featured prominently in the first groundbreaking Matrix movie, for instance. However, once Apple’s much cooler iPhone was launched in 2007, it was game over for Nokia. Below is a 10-year comparison of their share price performances:

Disrupted: Nokia vs Apple – 10 years

Source: Bloomberg

VHS and DVD rentals were a damaging advancement for movie theatre chains, but they amounted to a minor inconvenience versus the vast array of movies that suddenly became available at low cost via a Netflix subscription. And, as the release dates between theatre launches and Netflix launches compressed, not to mention the release of more and more original Netflix content, things got even worse for movie exhibitors. Below is a five-year comparison of Cineplex and Netflix performances:

Disrupted: Cineplex vs Netflix – 5 years

Source: Bloomberg

Video games were once the sole domain of the big game developers who published in physical CD format and online competition was largely ignored by them. This changed almost instantly with the online release of the tournament-style shooter video game Fortnite. Fortnite was released in 2017 but rapidly gained traction and became a phenomenon less than a year later. Below is the performance of Activision Blizzard, Electronic Arts and Take-Two Interactive, a few of the world’s largest video game publishers, over just the past year:

Disrupted: Activision Blizzard, Electronic Arts & Take-Two Interactive – 1 year

Source: Bloomberg

A natural impulse is to look at these examples and conclude that the disruptive forces could have been easily predicted. And some investors, no doubt, correctly did. But the majority didn’t, which is why all of these ‘disrupted’ companies have so badly underperformed. Ultimately, it’s an impossible task to correctly forecast and time disruption.

But deluding oneself with I-knew-it-all-along thinking is a favourite investor pastime and brings me to the behavioural investing trait of hindsight bias. Hindsight bias occurs when an investor treats any past event as if it were a logical, obvious and easily predicted occurrence. And hindsight bias usually leads to overconfidence with respect to future investment decisions. Investors prone to hindsight bias also have a tendency to exaggerate how easily and far in advance one could have anticipated a particular future outcome. Like witnessing an investor tell people that they knew the iPhone would be invented the minute they saw Gordon Gekko call up Bud Fox on his Motorola DynaTac 8000X. And if you don’t believe hindsight bias exists, read the comments section and see how many posters will claim to have easily foreseen any of the above-mentioned disruptive technologies. But only they and their god know if this is true and if they actually profited from this foresight.

Forecasting is incredibly difficult and outcomes only seem obvious in retrospect. And if you think you can anticipate each and every disruptive market force, you’re mistaken. Nokia was once a great stock to own, but not after the release of the iPhone. But did you invest in Nokia only on the way up and then exit precisely as Steve Jobs walked across stage at the Macworld convention in January 2007? Probably not. It only seems obvious to have done so in hindsight.

Now, we recently increased boring health care exposure within many of our clients’ portfolios. Naturally, different kinds of disruption can also occur within the health care sector—a dramatic shift in government policy, for example—but we think that the beneficial long-term effects of an ageing global population minimizes this risk. However, an even more important way that we minimized the disruption risk was by purchasing a broadly diversified health care ETF, added at only a modest weight and held within an even more broadly diversified portfolio.

Recognizing how golf technology is advancing, Augusta varies and enlarges its course by frequently acquiring additional land. The club also constantly redesigns its course layout—lengthening holes, adding trees, bunkers, etc. The 13th hole won’t be easy to play for much longer.

In a sense, Augusta has employed the best of all defenses against disruption: diversification.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.