There is one word that is overused by investors today – “disruption”. In fact disruption has been with us since the dawn of time. It is just that in today’s world more disruption is technology-led, which is being more readily adopted by populations, and so can go global much more quickly than prior disruptive waves.
But let me warm your palate with a few lines in behavioural investing:
Many years ago a strategist, who still writes great stuff on behavioural investing, posed a question to his clients:
“There are 100 people in a room. They can each select a number between 0 and 100, inclusive. The winner is the person who selects the number that is two-thirds of the average of all the numbers in the room. What number should you select?”
As it happens, when this game is tested in the field the winner will be the person that selects two-thirds of two-thirds of 50 (i.e. goes the second step) i.e. 22.
However, there will be a small but noticeable minority of people who select 0 to 5 – these people worked out that 0 is the correct answer, and everyone is a winner if they all select 0. In fact, once they work that out it is so obvious to them that they can’t see why anyone else would disagree. However, they figure that a few might, so they aim off a bit and select a number a little above 0.
These are the sort of people who are not making long-term investments in auto insurance businesses or auto dealers today. They feel they can see the answer, and fully believe that whilst others may not agree today, they will come round to their thinking in the near term.
And now to link this in with “disruption”:
We live in an age where computing power and digital storage has grown exponentially, whilst its cost has collapsed just as fast. That has allowed computers to crunch through the oceans of data available at lightning-fast speed for super low cost. Hence the days of Machine Learning are upon us.
All of that has allowed autonomous vehicles to come onto the horizon. First step is the advanced driver-assistance system which is already incorporated into many vehicles. Might as well throw Electric Vehicles in there as a side show, but will likely be part of the answer.
So, come the day we are all in autonomous vehicles – what are our insurance payments? I suggest very low. The auto manufacturer/software designer will be paying those, and they will be a lot lower than we all pay today. That begs the question – “if autonomous vehicles were invented first, would the car insurance businesses exist today?” I suspect the answer to that would be “No”. And so those investors that can see that wonder why no one else can, but in the meantime they permanently avoid investing in those insurance businesses.
And what about the Electric Vehicles we all own – and that assumes we own a car by that stage rather than merely rent cars for the journey? They have many fewer moving parts and components, which means that less tends to go wrong. A Tesla vehicle is more a computer than a car.
Auto dealers earn more than half their earnings from aftersales services – that must surely be under pressure at some point in the future. Would the auto dealers exist today if Electric Vehicles were invented first? I suspect the answer would be yes, but they would have a much smaller aftersales business, and we would still be debating the threat from a future where we may not own cars anyway. Again, those investors that see this put them in the “avoid” box and move on.
. . .if we replayed the game, but instead of 100 people we had 100 machines loaded with tensorflow machine learning (that is not complicated, even I have programmed my home computer to learn how to play and win tic-tac-toe – 300,000 games in it does not lose, 1,000,000 games in it wins 85%) then the machines will all give the answer 0. I fear the good strategist at the top of this post will also go the way of the car insurance businesses!
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