Software ate the world

In 2011, Silicon Valley entrepreneur Marc Andreessen declared software is eating the world. He made the claim at a time that technology stocks were relatively unloved and, certainly with hindsight, underpriced. I’d doubt he’d feel his thesis needs any further vindication. But here it is, in the form of a recent chart from Goldman Sachs.

Globally, technology stocks have more than doubled earnings per share since Andreessen shared his insight with the world. The earnings of stocks uninvolved in technology over the same period? Flat. Or up a little if you ignore the impact of Covid-19.

Of course, tech does not equal software. But it’s clearly getting harder and harder to be a successful old industry business. And indeed, 6 of the top 10 holdings the Forager International Shares Fund would be classified as tech. We bought them when misunderstood and cheap. We demanded a significant discount to intrinsic value. But they’re tech nonetheless.

Elevated expectations

Technology stocks may well continue to grow earnings per share faster than the broader market. But, and here’s the pivot point in the story, they must do so in order to justify today’s valuations and not by a little bit. We think investors blindly buying tech and growth today, especially at the pointier end, are probably going to have a bad experience. It may parallel the experience of value investors blindly buying discounted price to book value or low price to earnings stocks a few years ago.

Good narratives always contain some truth. The world is moving online and will continue to do so. Factories are becoming more automated and will continue doing so. Ignore those trends at your peril.

But ignore price at your peril, too. You can be right about the future and still not make money if you pay a price that assumes too much. And that’s the problem with many of the narratives today. You can make the same argument at absolutely any price.

The flip side is that today there are also stocks that no one wants to own almost regardless of how cheap they get. This market is unusually bifurcated. A carefully picked selection of these laggards should generate some outstanding returns as a result. Carefully selected is the key. In the long run, it always is.

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