The reasons it is difficult to invest into public listed companies now are not because of weak ringgit or low oil price. Although that add oils to the fire.
The 3 reasons are disruptive technologies, tightening of compliance procedures or regulations and productivity gains.
Note that this is not a research piece but based on anecdotal observations and articles you can find around you.
Disruptive technologies
We live in a time when everything is being disrupted. Traditionally bluechip and safe companies to invest in are being threatened by startups or technology that never existed 20 years ago. 2 decades ago would say “You can’t go wrong if you invest in this” , just like when my mum told me working in a bank is like having a ‘golden bowl’ job.
Think NOKIA.
Nokia has been a respectable company. They didn’t do anything wrong in their business, however, the world changed too fast. Their opponents were too powerful.
They missed out on learning, they missed out on changing, and thus they lost the opportunity at hand to make it big. Not only did they miss the opportunity to earn big money, they lost their chance of survival.
The message of this story is, if you don’t change, you shall be removed from the competition.
During the press conference to announce NOKIA being acquired by Microsoft, Nokia CEO ended his speech saying this “we didn’t do anything wrong, but somehow, we lost”. Upon saying that, all his management team, himself included, teared sadly.
And by the way, Blackberry, the grand daddy of smartphones, suffered similar fate as well.
Source: LinkedIn
Think of tobacco companies too. Like BAT and Phillip Morris.
This is one area that hasn’t really been battered down compared to the rest just as yet. Heck tobacco companies have been making bank for decades (maybe even centuries). Who would imagine that people might slow down with their cigarette buying?
Then comes vape. Chances are, you know someone who has converted from smoking cigarettes to smoking vape.
When you look at the stock prices from major tobacco companies they don’t seem to show as much of a weakness yet plus I hear that they’ve been getting into vape themselves. But hey… who would have imagined that cigarettes would ever be disrupted.
And who can ignore the emergence of shale oil, although coupled with slow demand ago, it made oil prices came crashing down. From a time where analyst were predicting $150 per barrel of oil down to circa $36-$40 per barrel. Just about every oil and gas company has been hurt by this with mass layoffs and retrenchment going on – even the big boy like Petronas a Fortune 500 company. If you had invested in any oil and gas companies related companies before year end 2014 and didn’t sell, you would have lost about half your money.
Tightening of compliance procedures & regulations
Security, privacy and data protection is non-negotiable nowadays. And one of the most effective way is to remove the human factor from process handling, or to add in more layers of human checking.
For business, this increases overheads because compliance activities are not revenue-generating, albeit necessary.
This is especially true in financial industry. For example, you could say goodbye to the signature method we all are used to when it comes to credit card payment. Starting Jan 2017, an industry wide move will take effect where all card transactions will be using PIN – https://pinandpay.com.my/en/
How about getting one major hit by regulatory bodies? Just ask Guinness Anchor Bhd, which was slapped with additional, back excise duties and sales tax by the Royal Malaysian Customs last year. Source – TheStar
And don’t me started on GST…
Productivity Gain
Productivity boost, the all-important factor in a country’s economic growth. Without more output of desired goods and services per working hour – that’s the measure of productivity gains – an economy inevitably stagnates.
As Warren Buffett wrote in his 2015 letter to shareholders, “The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming.”
Innovation boosts productivity, which in turn, boosts prosperity. Even if a company rides on the waves of innovation, it will also encounter its own set of new problems.
For example, the invention of smartphone for the mass market is like the Second Coming in Bible. We can so many things done on the move. It is unimaginable just about 10 years ago when you literally can have a supercomputer with access to worldwide network in your pocket. Coupled this with the fact that each country had licenses limited to a few players. It’s a monopoly business, the entry barriers are high, so called ‘moat’ in value investing. How can you go wrong?
Well it turns out you can. Today many telcos around the world have reached a saturation point in terms of new subscribers and average revenue per unit (subscriber), or ARPU, they can pull. Add the increasing competition and it makes their business environment a little harder.
Furthermore, the part whereby it costs the most for telcos to run is its data segment, not voice or SMS. Smartphone are hungry for the former, not the latter – so you can give all the unlimited voice calls or SMS, users just don’t really care anymore. What they need now is data, and it’s the costliest for telco to build/maintain infrastructure that supports high bandwidth, high speed and high stability data plan.
*****
We live in a world now where “safe companies to invest in” are no longer safe. Market conditions change rapidly like never before and multibillion dollar companies attract disruption in its own industry and I can see why it’s harder and harder to pick the winners to invest in. The solution? Keep learning and up-to-date, we can’t afford to be lazy to know what’s happening around us as an investor, and perhaps apply a bit of common sense to foresee what’s going to go big.
Adapted from the billion dollar safe companies that are no longer safe by Timothy Tiah