By Timothy Videnka, CFA, CFP®
“In the short run, the market is a voting machine; in the long run, it is a weighing machine.”
Every era has a story so compelling that questioning it seems borderline irrational. Consider society-changing innovations such as electricity, radio, cellphone, internet, smartphone – compelling stories are usually built on something real. The attached chart from Alpine Macro illustrates one of the most important investing lessons we try to keep in mind at Forza: great innovation and great investments are not always the same thing – at least, not at the same time.
In the late 1990s, technology was genuinely changing the world. Productivity improved, businesses digitized, and the internet fundamentally altered commerce and communication. Markets noticed – perhaps a little too enthusiastically. This period is labeled Value Creation on the chart above as the Information Technology sector and the stocks comprising it discounted a new era where high valuations within the sector were considered to be the new normal.
Priced for Perfection
Capital rushed into technology stocks as though the future had already arrived – and arrived perfectly, on schedule, with no setbacks, competition, or valuation limits attached. Investors didn’t merely buy growth – they pulled tomorrow’s optimism into today’s prices and, for a time, created immense value for the stockholders of those businesses. As often happens, though, reality eventually tapped the brakes.
After the bubble burst, something interesting occurred: technology did not disappear. Quite the opposite – it quietly fulfilled many of its promises. But instead of all the benefits accruing to a handful of glamour stocks, those gains began spreading throughout the economy.
This next phase, labeled Value Dissemination in the chart, saw more traditional businesses increasingly benefit from technology-driven productivity. Manufacturers optimized supply chains. Financial firms automated processes. Healthcare became more data-driven. Retailers improved logistics and sold to their customers directly online. Meanwhile, many “boring” value-oriented stocks quietly outperformed.
In other words: the creators of innovation are not always the same as the winners in markets. That distinction matters.
Today’s New Normal: TBD
Today, investors again find themselves captivated by a transformative technology narrative. Artificial intelligence (AI) is here and likely to reshape industries in ways we can barely imagine, while creating new ways of doing things that we cannot yet envisage. Ignoring the possibilities would be foolish.
But history suggests a useful caution: when a small group of companies becomes viewed as the exclusive gateway to the future, expectations can become exceptionally difficult to satisfy.
Sometimes the question isn’t, “Will this change the world?” but rather, “How much of that future has already been priced in?”
The irony is that transformational technologies often create their largest economic impact not for the benefit of the innovators themselves but through the companies that adopt them. Think of electricity: the invention mattered but factories and industrial firms that learned to harness electricity transformed productivity for decades.
AI may follow a similar path.
That doesn’t mean today’s market leaders are doomed nor does it mean investors should abandon innovation or retreat to caves with canned food and gold bars (as tempting as financial television occasionally makes that sound). It simply means concentration, valuation, and expectations still matter.
History rarely repeats perfectly. It does, however, have a mischievous habit of rhyming.
At Forza, our job is not to predict headlines or chase whatever acronym Wall Street falls in love with next. Our job is to own durable businesses, diversify intelligently, and avoid paying tomorrow’s prices for yesterday’s excitement.
The question worth asking today: if innovation creates the value, who – ultimately – benefits from it?