Compounding is a term that most of us are aware of. Many in the technology world use the term exponential. When you think about it, they really are telling a similar story.
This is why the impacts of technology are so profound and why every investor should be paying attention.
To put it in numerical terms, let us think of it like this:
Suppose we are talking about something compounding at 10% a year. Thus, we see a steady rate of return over time. What makes the numbers different is the starting point. Where are we starting from when adding 10% compounded annually?
If, for example, we are starting with a thousand dollars, then the impact will not be that great. In this situation, at 10% growth, we see a $100 added first year.
This takes on an entirely new meaning if we are dealing with the net worth of Jeff Bezos. Under this scenario, we are going to see much more progress over the next 5 years since the starting point is so much more advanced. Instead of $100, we are looking at roughly $12 billion. The growth rate is the same but the numbers are much different.
We can take this same mindset to technology. The 1960s were like starting with $100. If we transition to the 1980s, it was akin to $1,000. The 1990s, perhaps, pushed us to $10,000. Today, we are talking million.
Even if the pace of technological development remains the same (our 10% growth rate), we are much further along than we were 30 years ago. Thus, the starting point is much higher.
What we really need to consider is the fact that the pace of technological advancement is accelerating. There are more people working on different things with a great amount of money being invested. This is like the growth rate, in our example, going from 10% to 20%.
How does that affect the situation?
I might be a bit biased but I feel that the technological development is the most important aspect of investing today. The idea of investing where there is a "moat", to use Warren Buffett's term, is hard to do. Moats can disappear very quickly and from any direction.
Let us look at the fossil fuel industry. It is safe to say that industry has quite a moat. There are hundreds of millions of cars on the road who all consume gas or diesel. Most power plants had some type of utilization of fossil fuel. Yet, at present, we see an industry that is under attack. There is no way to overlook what is taking place within that industry.
That is how quickly technology, along with a change in societal views, can alter an industry. One can go from well protected to under duress in only a couple of years.
The compounding (exponential) nature of technology makes this so.
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