Where to invest in 2017 (for 2037)
Investing in Australia has been relatively straight forward for the past thirty years - buy domestic banks and property - however, this investment strategy is in its twilight. The challenge for investors, and indeed for the Australian economy itself, is to invest for the future rather than the past. More particularly, the challenge is to find companies with vibrant and ambitious growth stories in which to invest today.
I offer three observations that highlight the challenge facing domestic investors:
- our market is heavily skewed toward resources and financial services with a very limited investible technology sector, this is a problem;
- our listed companies are focused on exploitation rather than exploration; and
- our public markets are stale, with not enough vibrant new companies of significant scale and very few "founder controlled" companies.
These observations reflect not just the challenge for investors, but an underlying structural problem in the Australian economy.
Our top five companies are BHP followed by four major banks. Technology companies represent less than 1% of the ASX200, versus more than 20% in the S&P500. With the exception of Macquarie Bank, Australia has not created a single new truly big business in 100 years. Whereas, 5 of the 10 largest companies (by market cap) in the United States were formed over the past forty years, including Apple in 1976; Microsoft in 1975; Amazon in 1994; Google in 1998; and Facebook in 2004.
Quoting the always insightful Bernard Salt of KPMG, "
Australia is a backwater when compared to the scale, boldness and sheer commercial ingenuity (of the United States) - the greatest economic force the world has known.
There is much to criticise about America. What is beyond question is the nation’s unparalleled ability to cultivate and monetise innovation. We would do well to try to understand how they do it.
Very few companies balance exploration and exploitation by continuously looking for the next genuine problem to solve. All companies start solving a real problem - this is the foundation of a successful startup - and as they mature many companies shift their focus to exploitation, often to the exclusion of ongoing exploitation. They become more complex, they focus on the administration of the business and prioritise analytical thinking (whereby all proof emanates from the past) to the exclusion of abductive reasoning. They worship at the alter of reliability, but in so doing drive out innovation.
This is particularly the case for publicly traded companies have great pressure to exploit a certain advantage. Fund managers and analysts discourage exploration, the very activity that creates enduring competitive advantage. Founder controlled companies, such as Google, Facebook and Amazon – and for a time Apple – operate with a very different perspective and I suggest this underpins much of their success.
Australia needs to create its own globally relevant, bold and ambitious companies of the future, built and controlled by entrepreneurial founders. This is why it is so important to back startups, to foster a culture of entrepreneurship and to celebrate the success of our best entrepreneurs. And as these entrepreneurs build vibrant rapidly growing businesses, with bold ambition, these are the companies in which we all ought invest.