Both Milton Friedman and Irving Fisher influenced my view of economics, and consequently, however I view the purchase of publicly traded businesses that we call stock, by calling my mind to the fact that businesses consist of a web of contracts and other required financial obligations that are necessary in order to sell a good or provide a service, and the corporate residue that is leftover after the good is sold or the service is provided is what we call “profit”.
It would follow, then, that the best stocks to purchase are those in which the web of contracts and other required financial obligations can be dramatically curtailed in the future, or alternatively and preferably, where the sale of goods or services can be increased at the maximum rate without a corresponding increase in the costs arising from the web of contracts and other financial obligations that are necessary to achieve this increase in the sale of goods or services.
I say the latter is preferable because there is a limit to how much one can cut costs and financial obligations (zero) but there is no limit to how many goods or services can be sold (one more widget can always, at least theoretically, be produced).
With this in mind, I pay close attention to how developments in technologies can affect the future prospects for a given stock. If you pay close attention to how individuals have become comfortable purchasing items on the internet, you can anticipate and correctly identify that profits at Nike ought to rise substantially as it is no longer bound by middlemen (such as Dick’s Sporting Goods) or even the concept of the physical store in order to sell shoes and athletic apparel, giving it the double benefit of lowered costs and an unbounding of its capacity to sell more widgets or services).
Secondly, you will also pay close attention to the fact that technological developments can only enhance wealth for the long run when it is integrated into a task. Knowing how to produce 1,000 beverages per minutes instead of 500 beverages per minute creates nothing until a beverage company enters and makes payment on said machinery and then actually goes out there and sells the beverage.
On the other hand, blockchain technology, which can create a series of time-stamped ledgers that builds upon itself in recording iterations of some instance in electronic form, can enhance the profitability of a bank like J.P. Morgan when it is integrated into the task of settlement payments quicker and with a higher degree of authenticity but is worthless when it is integrated into Bitcoin that can neither improve the efficiency or cost of the “web of contracts and other financial obligations” nor does it relate to the sale of any product or service. Instead, it is integrated into what is effectively an online counting mechanism that is euphemistically dubbed a currency. That is why someone like Bill Gates is loading up on bank stocks through his Cascade Investments L.L.C. investment arm but he won’t touch Bitcoin in his personal accounts.
WIth these Friedman and Fisher guidances in mind, I published a post on Patreon that covers three stocks primed for future outperformance because of how they are integrating technology to either lower costs or ramp of the sales of goods, which you can access here.
As always, thank you for reading.
Originally posted 2018-11-18 18:20:20.