The Wall St. pro shares the latest views of a mentor who sees a new breed of innovators emerging.
Editor's Note: Wien is a senior adviser to Blackstone, the asset management and private-equity firm.
People often ask me if I have a mentor, someone who has influenced my thinking over my career. I have had many, but over the past thirty years I have learned a great deal about investing from the person I have come to refer to as The Smartest Man in Europe. The most important lessons he taught me were (1) that the primary force behind good performance is recognizing important changes before or just as they are starting to happen, and (2) when something significant is happening, put a lot of money behind it. Concentrate on the big ideas; don't over-diversify.Byron Wien on "New Industrial Revolution"
The Smartest Man earned his title over the years by recognizing important shifts early. He saw the rise and fall of Japan in the 1980s and he was early in recognizing the investment significance of the reforms Deng Xiaoping was putting in place in China. He saw opportunities and then risks in emerging markets and technology in the 1990s and he was among the first in my sphere to see the coming of the break-up of the former Soviet Union and its meaning for investors. He has a mercantile background and hundreds of years ago his ancestors sold food, supplies and weather protection to travelers along the Silk Road. He grew up hearing talk of investment opportunities around the dinner table. He received a European education and, after an apprenticeship in New York, returned home to take advantage of the post-war recovery taking place there. I have written annually about his views since 2001.
"There is a new industrial revolution taking place around the world based on innovation. It is centered in California but there are pockets of it elsewhere in the United States and in a few places abroad. There are creative new companies being formed every day. Investors underestimate the significance of this change. It is not only in Internet-based technology, but also in biotechnology. Over the next few years you will see blockbuster products being approved for cancer and heart disease. Alzheimer's and Parkinson's are proving harder to deal with. In information technology the primary beneficiaries will be Google, Facebook, Salesforce.com, Microsoft, Amazon, LinkedIn and a few others, but not Twitter, which I view as a company feeding off the primary companies driving the change. These new companies are making IBM a corporate leader of the past. The drivers are changing the way manufacturing is being done, inventories and transportation are being handled and all forms of communication are taking place. The earnings for these companies are open-ended. In biotechnology the new products will extend life and reduce invasive surgery, and who can say how much that is worth? This is all very exciting and should be the focus of every investor's attention. You can invest in an industrial or consumer company where the earnings are growing 5%–10% annually, but these companies based on technological breakthroughs should do much better than that, and their valuations are still reasonable, in my opinion.
"Overall I see the United States growing at about 2% in real terms. To grow at 3% you would need another building boom and I don't see that happening anytime soon. The use of robotics will improve the productivity of industrial companies and profit margins will stay high, but it will be hard to bring down the unemployment rate. Technology is good news for the world because everything can be done more efficiently, but the bad news is that this means it takes fewer workers to perform the services or make the goods, and the only way to create jobs is through faster growth, which is hard to achieve in a mature economy. Take the banking industry, for example. Thousands of jobs have been lost there and the staff reductions aren't over. We have to learn to live with a higher level of unemployment and there are social and political issues associated with that.
"There is a further problem in that the broader use of technology has made the skills necessary to get and hold a good job more demanding. You will need a fine education and even then it will be tough to find a satisfying job. Many young people are not working in the areas they were trained for. Those who are employed in their desired field will find their wages going up very slowly. As for the inequality problem, I am not hopeful. It has been a part of society since the beginning of time, and now that business is increasingly knowledge-based, it is likely that the problem will get worse and I don't think much can be done about it.
"The broad market will probably not have a major move over the intermediate term, but the innovators will do well. From time to time there will be surges in certain sectors. The homebuilders had their day, now energy and oil service stocks are doing better, but the secular move higher will be accomplished by the innovators. Everyone is worried about interest rates increasing, but that is not likely to happen. Rates may go up slightly in the developed countries from present low levels, but there is so much money looking for a safe place to wait until the outlook becomes clearer that I don't expect yields on quality sovereign or corporate debt to move substantially above present levels.
"Germany is a curse. Europe needs more money to stimulate its growth. Europe is out of the deflationary recession that was caused by the austerity programs that Germany supported, but it is only growing at 1% now. It needs a dose of quantitative easing to grow faster, but Mario Draghi, the head of the European Central Bank (ECB), refuses to provide it. He has been encouraged by his German advisers to be wary of inflation, but more people in Europe are worried about deflation than inflation. The inflation rate in Europe is less than 2%.
Monetary easing would be good for the economies across the continent. A few weeks ago the ECB announced some minor accommodative steps, but they were insufficient to have any profound impact. There is one circumstance that could cause the ECB to ease monetary policy in a major way and that would be if the economy of Germany starts to slow down. I think that is likely to happen in the next year, and then you could see Angela Merkel prevailing on Mario Draghi to liberalize monetary policy....MORE
