Innovation: There Is No SubstituteSubmitted by Silverlight Asset Management, LLC on May 18th, 2017
“I’m not going to say ‘no’ to an open runway and a thousand-horsepower car—I’m going to go 180.
Then he tells me to slam on the brakes and take my hands off the wheel while I’m doing it. In a car I’ve never driven, in a place I’ve never been, going 180 miles-per-hour….
But if the guy who has his name on the car is telling me to do something, I’m going to do it.”
That was Travis Okulski’s thrilling account of his first experience operating a hyper car.
Capitalism is competition. A constant race to be better, cheaper and faster.
One business that knows the utility of ‘fast’ is Porsche. The German motorsports company owns 28,000 racetrack wins, including a record 16 victories at the historic 24 Hours of Le Mans.
Like any great company, Porsche honors its heritage while constantly innovating. The Porsche 918 Spyder, pictured below, is an engineering marvel. It is what auto enthusiasts call a “hyper car” or “a car whose only purpose is to inspire awe.” The 918 and its arch rivals—the McLaren P1 and LaFerrrari—are locked in a fierce competition to be considered the fastest, most powerful, most striking car on the planet.
As you might expect, the Porsche 918 is fast. It travels from zero-to-60 mph in 2.5 seconds and has a top speed of around 210 mph.
The 918 also happens to be ‘ecofriendly.’ It’s an electric hybrid.
Originally, R&D efforts to explore electric technology were necessary to meet new fuel emissions standards. Along the way, it was discovered electrons also boost power, filling the gaps left by an internal combustion engine.
To develop the 918, Porsche designers started from scratch with a blank piece of paper. This mentality propelled what became a no-compromise concept. The 918 soon demonstrated “the potential of the hybrid drive to a degree never seen before: parallel improvement of both efficiency and performance without one being at the cost of the other. This is the idea that has made the Porsche 911 the most successful sports car in the world for 50 years.”
Now, the 918 Spyder will act as the “gene pool” for a whole new generation of sports cars.
The Investment Racetrack
As investors, we don’t compete on circular tracks like Porsche. Our aim is to ascend. We are all chasing the lifestyle we want in the future.
Imagine the mountain pictured as your future. From the options below, how would you choose to get to the top?
- Driving a car
If you value speed and efficiency, you take the car.
Next, pick from the following car options:
- Porsche 918
- Toyota Camry, or
- Beat-up ‘jalopy’
Personally, I take the Porsche. (After all, it’s been my favorite sports car since I was 8 years old.)
Assets are vehicles we use to grow our money. The Compounded Annual Growth Rate (CAGR) of an asset is like ‘horsepower,’ in the investing arena. The higher an investment vehicle’s CAGR, the farther and faster it can transport your capital.
You often hear about the stock market and how someone made or lost a fortune in it. Why are stocks more commonly discussed than bonds or cash? Because, over time, stocks have produced superior returns.
Since 1928, here are the annualized returns for each asset class.
Stocks: 9.6 percent
Bonds: 4.9 percent
Cash: 3.5 percent
If you have a long-term investment horizon, a simple allocation choice is to select stocks, since they have historically been the most effective money generator.
“There is No Substitute” is more than just a slogan for Porsche; it is about always striving to engineer something more exceptional to stay ahead of the competition.
Business leaders are well served to think this way. Whether a company is building cars, like Porsche, or connecting cars with passengers, like Uber, in the current economic climate (i.e. where prices are steady or falling while growth is accelerating), it must be innovative and maintain pricing power in order to dominate (in terms of market share and investment returns).
“Innovation distinguishes between a leader and a follower.”
- Steve Jobs
Likewise, innovation is vital in the field of investment management.
In my 2009 book, I said, “One approach to beating stock markets lies in being dynamic—never adhering for all time to a single investment idea—and gleaning information the market hasn’t yet priced in. In other words, you cannot adhere to a single set of “rules” and hope to outperform markets over time.”
To outperform, one must lead, not follow—adapt and avoid rigidity.
After all, outperformance comes from being early; that is, exiting or entering a market before the rest of the pack. It requires unique foresight, which comes from unique insight.
Since markets are always adapting and evolving, I believe it is imperative that professional investors act similarly.
As such, earlier this year I invested time staring at my own blank piece of paper. The goal? Design a ‘next generation’ valuation model to integrate with other tools I use to make buy and sell decisions.
Below is a sneak peek at the historical ‘horsepower’ of the new model (over the last seventeen years). It uses simpler inputs compared to its predecessor, yet has a more effective output.
- Top-ranked names delivered a cumulative return exceeding 900%
- The market index returned 127%
- Bottom-ranked names had a negative 18% return
*Source: Bloomberg. The figure above is a hypothetical back test study using the Russell 3000 Index as a universe, sorting constituents by annually rebalancing from 12/31/1999 – 12/31/2016 in accordance with a Silverlight Asset Management, LLC designed multi-factor model.
Using the earlier analogy, you might say that the highest ranked stocks are akin to a 918. The longer any vehicle travels at an above-average speed, the more it leaves the competition in the dust. That's the magic of compounding.
Is a Porsche the right vehicle for everyone? Certainly not. On the road, some people value safety and reliability more than speed. That’s why Volvo has a rightful niche in the car market. Similarly, high-quality dividend stocks and bonds have a deserved place in some investors’ portfolios.
The key is to carefully discern what mountain you want to climb, and identify the most effective vehicle(s) to get you to that summit. It’s a long journey, so pick a vehicle you are comfortable riding in. Life’s too short not to enjoy the ride.
As a bonus, here is a two-minute video from a few years ago introducing a new Porsche 911. It showcases the company's innovative spirit.
Sources: www.porsche.com, APEX: The Story of the Hypercar, Fisher Investments on Consumer Staples
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