The Single Most Important Factor in Investment Returns
“Buddy, can you paradigm?”
So the wise guys have jibed at me over the years that I have been posing and preening as a “paradigm” scout. Echoing the Depression era lament, “Buddy, Can You Spare a Dime?” — they imply I wave around my paradigmatic investment models like a panhandler’s signs.
We’re “building a tower up to the sun” for the electromagnetic spectrum and so forth, but for now, can you spare your investment dimes for my publications down at GilderPress.com?
If you are so smart, they say, why are you still hustling investment letters?
Paradigms are technology systems of the world: sets of assumptions that guide investment and enterprise.
My detractors see paradigms as big blowsy marketing buzzes that have little traction in the real world of revenues and earnings.
But big blowsy ideas can sweep you toward giant expanding opportunities.
Paradigms Drive Profits
In the 1990s, the wise guys laughed at me and even interrupted my speeches with catcalls when I celebrated a new paradigm for wireless.
That was Qualcomm’s CDMA (code division multiple access) “spread spectrum.” It used all the available bandwidth in every cell-site, lowering power as much as possible and differentiating calls by code.
The wise guys charged that Qualcomm founders Irving Jacobs and Andrew Viterbi should be incarcerated for willfully “violating the laws of physics” with their silly theories of lowering the power to expand the capacity and mimicking noise to enlarge information.
At the time, the industry’s prevailing paradigm separated channels, divided them up into narrow exclusive timeslots, and increased data rates by maximizing the power.
Jacobs and Viterbi grasped that what matters in communications is not maximizing the power of transmission. Large variations in power constitute noise and obscure other signals. The goal, as they saw, is to control power and reduce it to the lowest level that still makes the message’s bits and bytes intelligible.
The object is not to blast the signal across the land on 50 kilohertz waves like an AM radio station which reaches more people in proportion to power it can transmit. The goal is to maximize the number of unexpected bits — the information entropy — that all phones or two-way radios can transmit or receive in a particular cell.
Operating at watts rather than kilowatts, Qualcomm was the first company optimized for the new era of low-power communications.
In the 1990s, the low-power paradigm prevailed over high-power bandwidth. During that decade, Qualcomm became the best performing stock in the market, rising 2,619 percent in 1999 alone.
Paradigms are important. I could make the argument that they are the single most important factor in investment returns.
The Economic Importance of Abundance and Scarcity
Let me start with the biggest one of all, which was taught to me by Carver Mead, the Caltech professor behind Moore’s Law and some 30 Silicon Valley companies. Included among the Carver companies are two of our current “Moonshot” paradigm leaders. Click here to find out more.
Carver’s theme is that entrepreneurs waste what is abundant in order to conserve what is scarce. The key to successful investing is knowing the difference.
All too often, people perversely waste what is scarce in order to save what is abundant. Such is the commanding principle of the “sustainability” movement — wasting the surface area of the planet, arable land, producing useless ethanol for cars.
Strewing windmills and solar panels across the limited landscape and burdening the reliability of the power grid with the need for “smart” and vulnerable backup and buffering facilities.
Or wasting rare human ingenuity in order to save or suppress ever more abundant “natural resources” such as oil and gas by leaving them in the ground, or wasting time (money) and human skills (minds) extracting harmless chemicals such as PCBs from rivers and soils.
Defying all subsequent failures to prove any health damage from these chemicals, the EPA has extorted billions of dollars and endless time from General Electric. It has wasted and distracted GE’s scarce resources of leadership to the point that this once paramount American manufacturer has become an aggregation of lawyers and financial consultants, perhaps America’s most burdensome abundance.
Abundances and scarcities play out in a spiral of reciprocity, with each producing its opposite in the cycles of economic advance.
Thus, the information abundance produced by the computer and internet eras rendered telephony’s wireline links, once adequately abundant for voice, inadequate or scarce for voluminous streaming video and other “big data.”
In free economies, abundance always prevails when human minds are unleashed.
Placing Bets on Knowledge and Creativity
Wireline scarcity led to a series of inventions enabling movement up spectrum into the vast domains of infrared light. That breakthrough fueled fiber optic bandwidth abundance. When fiber optics made long distance communications fantastically abundant, scarcity migrated to wireless last mile links to mobile human beings. Qualcomm was there to provide new mobile digital bandwidth abundance.
Why do free economies prevail? They carefully conserve and cultivate late economist Julian Simon’s “ultimate resource,” always scarce and precious: creative human minds.
The great delusion of Silicon Valley today is to bet on artificial intelligence and machine learning as replacing human minds, rather than merely aiding and enhancing them.
For most of human history, most people have believed that scarcity will ultimately prevail over abundance. Whatever set of materials is essential to production — whether land, food, energy, bandwidth, or a polymorphically scarce element termed “the environment” — will ultimately meet diminishing returns and run out.
Still dominant in government and in our universities, this paradigm can now be tested.
Time prices reduce all economic activity to hours and minutes of work needed to buy the commodities that sustain our lives and civilization. Calculated with nominal GDP or nominal commodity prices divided by nominal wages, this theory measures all activity neutrally across time and space.
Our time price theory, borrowed in detail from Gale Pooley and Marian Tupy, shows that for the last 40 years nearly all commodities, from energy to fish to iron to travel, have been growing massively cheaper. That means more abundance in relation to the governing scarcity of economics, which is time.
Underlying this paradigm is the understanding that natural resources are essentially unlimited — the universe’s supply of atoms is infinitely abundant. What is scarce is time and human ingenuity, minds and minutes, needed to combine them into useful forms and products, goods, and services.
Investors should place their bets not on power but on knowledge, not on materials but on human minds.
The decisive scarcities are not infinite and eternal atoms but scarce and precious minds and minutes.
Editor, Gilder’s Daily Prophecy