By popular demand, David Gardner shares some of the key ideas that color his worldview in this segment from Rule Breaker Investing. He discusses the importance of taking a top-down view of the world with systems thinking, specifically regarding how innovation and technology are pushing private companies further and further ahead of the government, as well as the implications that may have in the future.
A transcript follows the video.
This podcast was recorded on Oct. 19, 2016.
Before I warm up my second Dickensian paragraph this week, I want to now introduce a little bit of systems thinking. So, I'm looking back at Oct. 7th of 2015, when I did a podcast entitled "How Investors Should Think About Thinking".
And one of the things I talk about in that podcast (if you want to go back and listen to it, if you didn't get it the first time) is systems thinking, which is when you try to get above a system. Look down on it. Maybe take a forest-level view and see how the cogwheels are spinning. And get above things, and look down on them, and understand how when one thing strikes another, logically, a third thing will develop.
So, when we can see the system, which is what I'm going to try to do with you a little bit, here, I think it makes us not only more able to predict what's going to happen in the future, which is, I think, a really key trait of systems thinking, but also have a wider perspective. And again, during this very busy election season, I think having a wider perspective is needed.
So, a little bit of systems thinking. In fact, a few of you either emailed me or tweeted me this summer and said, "Hey Dave, how about talking a little bit more about your worldview. What actually underlies a lot of what you say on the podcast? You talk, sometimes, about conscious capitalism and these kinds of things." So, I'm responding to that a little bit with some systems thinking.
Before I share it, I want to say, this is just my thinking. I'm giving you kind of how I frame things up, and why I decide to pick this stock, not that one, or what I value in business, or what I like to talk about on this podcast. By no means. I'm very conscious that it's a motley world out there. I've made that point a number of times on recent podcasts, so I'm by no means thinking that I'm definitely right. In fact, I'm quite sure I'm not going to be right (and you can probably help correct my thinking), but I do feel like I owe it to my Rule Breakers and my listeners to kind of show how I think about things, and why I make the decisions that I do.
So, here's a little systems thinking, and it's about business versus government. That's kind of where I'm headed, here. So, one of the first premises that I have is that business moves faster than government, because in general, business has a lot of things that government doesn't have.
It has more incentive. Entrepreneurs are really driven in a way that I don't think almost any other sector of our society is. The innovation that's expected is you compete in business against either existing competitors that may be bigger than you, or new upstarts who are using the internet or some new technology like AI to compete against you. You have to move faster. I have a lot of friends who do work in the government. They frequently tell me they don't think they move very fast. That can be a strength, sometimes, of government.
One thing I learned from the JCOC experience earlier this summer is that how we use the word risk is very different -- those of us in the private sector versus those in the public sector. So, in the public sector, if you're in the military, risk is a really important word, and it's something that you really can't screw up on. Because if you make a mistake in a military context, you can really, really harm the world. Whereas if your product didn't hit that well, or if you made a bad investment as a risk-taking Rule Breaker investor, that's OK. In fact, we kind of expect that.
So, there's sometimes some really systemic reasons why government, I think, moves slow and business moves fast. To me, this is fairly self-evident. I don't know if it's controversial for anybody listening. Let me know if you think I'm wrong on this one. That's premise No. 1.
Premise No. 2 -- I think business is only further speeding up. I think we've seen examples of this in recent years when we just think about the technological gains just with our phone. Just look how the phone has substantially changed in 30 years from a rotary dial phone, to a push-button phone (those were both part of my youth -- perhaps yours, too), to just an early mobile phone based in your car, for the most part. To then slightly less-early mobile phones that weren't smart yet, to smartphones, to now supercomputers residing in our pockets that have all the world's knowledge and the ability to contact for free, by video, almost anybody else in the world.
That's just in 30 years. There are very few things that I can think of, and that's just one example I can pick that would be analogous in any way if you're thinking from a government context. Now, by the way, a lot of great R&D is performed by the government, which helps accelerate (the internet being a good example) business. But I think business is only further speeding up. And I think government, arguably (at least in the United States of America), is slowing down. It's really big. It gets bigger. There are many, many people committed. It's just harder to move fast.
Andy McAfee, who is a friend of ours from MIT Media Lab, he's been to the Fool, before, spoken at Fool HQ. Wrote a fine book I'll recommend to you called The Second Machine Age. He talks about how, in fact, technology's now moving so fast, Moore's law cycling in its 30th, 31st cycle. When you keep doubling things every few years, this happens: that "things are getting weird".
In other words, we've now reached a point where there's just remarkable amounts of innovation across so many different contexts, from genomics right through to how you and I find entertainment, which, today, is everything from Netflix to video games, but now, increasingly, there will be virtual reality. All kinds. I mean there's so many changes going on that things are getting weird. It's happening fast.
And Robin Hanson who, on this podcast a few weeks ago, talked about when robots rule the Earth, approximately 100 years from now, in his mind. But he talked about how you really can't stop innovation. This is really true, as he spoke about this. You know, somebody invents something, and the world changes. There's no central control that governs slowing down the pace of technology, or when something might or might not be invented. Stuff just happens these days, and all the rest of us are reacting. So, that's premise No. 2. So again, I think business moves faster than government, and I think business is only moving faster and faster.
No. 3 -- Also part of my systems thinking. I think the best talent will naturally flow, for the most part ... the best human talent ... to the best opportunities. And when the best talent does flow through to companies like Google, those companies go on to win. It's a very predictable thing, and I think, given the dynamism of the business world, this is not surprising why, for me, anyway, I think the best and the brightest, these days, tend to go into business; not just in the U.S., but worldwide.
It's not to say that's the only destination, or that everybody does. No, not nearly. There are many choices that greet our college graduates these days. But if you look at just the growth of the private sector and all the wealth in the stock market ... in fact, the United States, these days, is more than half the world's stock market value. More than half of the world's total equity value resides just in the U.S. stock market, and that's a remarkable thing to be able to say, here in a country that in some ways feels like its morale is low right now.
Point No. 4. Ultimately, based on the previous three systems' thinking points, I kind of see business eclipsing and outrunning government. The government, by the way, at least in the United States of America these days, is pretty much at all-time lows if you look at things like Congressional approval ratings, or even approval ratings of this president (a president that I like, for the most part). We're seeing people basically say, this system is not working.
And I think it's not surprising that we don't feel that it's working. I think it's because we've gotten used to -- often here in the United States; perhaps your country, too, if you're not an American -- things running better when the trains are being run not by Amtrak or, in our case here in Washington, D.C. the Metro, which is $1 billion underwater and having trouble finding new riders because it's not able to move quickly enough, as millennials start saying, "Hey, I'll just take Lyft. I don't need the Metro."
And so these things end up happening versus when they're run, I think, by for-profit incentive, often driven by visionary entrepreneurs who are trying to come up with better solutions. There's no surprise to me, in my way of thinking, that Federal Express, these days, has had a lot of the government's work outsourced to it. It's just more dependable and more cost-efficient.
I'm about to head back to Dickens, but I can't not think about the Blues and the Buffs, and that mentality that if it's all about just shouting down the other party, who really is being served by that?
And maybe my final systems-thinking point -- here it is, No. 5 -- what are the implications of this going forward? What are the predictions that you and I can make about this, if you agree with the previous four points? And my answer is, I'm not fully sure. So, my final bit of systems thinking is, I'm not really sure where this system leads us, but I do like to think about the system, so maybe I've helped you think a little bit about the system. Again, getting out of the context of fall 2016 and look at what's really happening, and where it's likely to take us.
I mean, I think there are some guesses we can make. Things like intellectual property. In fact, Motley Fool headquarters is just a couple of blocks from the Patent and Trademark Office, and how long it takes to get a patent processed these days ... usually a few years at a time, when everything's speeding up so much ... starts making me think you shouldn't spend a lot on patent and intellectual property protection in a faster-moving world. That's just a light observation. But really, this concluding point for my little systems thinking is to invite you to help me think about the implications of these things.