The history of technology is really a story of continual creative insurgency. Once every 20 years or so, an outbreak of innovative technologies has upended the status quo and ushered in a new generation of market leaders. The process continues today—but at a much faster pace and on an even greater scale than before. Investors adhering to benchmark-sensitive or index-tracking approaches will be overly bound to legacy technologies and, thus, at greater risk of getting left behind. However, thematic investment strategies that are less constrained and more forward-looking offer a better way to capitalize on this era of accelerating innovation.
A game of chess
The process of creative insurgency is driven by the nature of technological progress and this happens exponentially, rather than in a linear fashion—at first at least. The mindboggling power of exponential growth is often illustrated by the well-known legend of the rice and the chessboard. In it, the fictitious inventor of the game of chess presents the game to the Emperor, who is so impressed that he offers the inventor any reward he wishes. The inventor asks that he be given one grain of rice on the first square of the chessboard, two on the second square, four on the third and so forth—doubling the amount each time.
The Emperor immediately grants this “small” request, thinking he had struck a great bargain. Unfortunately for the Emperor, he underestimates the power of exponential growth. Though a chessboard has only 64 squares, the total number of grains needed to fill the board is nearly 18.5 quintillion, resulting in a pile of rice the size of Mt. Everest. With each repeated doubling, the incremental growth is especially significant on the second half of the chessboard.
We see examples of such exponential growth all around us today. Cells in our bodies grow exponentially. If left unchecked, bacteria and viruses also grow exponentially. In the world of technology, we’ve seen exponential growth in the number of transistors on a silicon chip, otherwise known as Moore’s Law. In biotechnology, we have witnessed an exponential decrease in the cost to decode the human genome. Just as the Emperor marveled at the rapid accumulation of rice on his chessboard, so too must investors ponder the implications of the profound gains to come from technological innovation.
In our view, less constrained approaches, such as thematic investing, are best positioned to fully exploit the trend of accelerating technological innovation because they are free to follow it, rather than suffering its consequences.
Dan Roarty is head, global growth & thematic portfolios, AllianceBernstein