Structural Change Investing
Trace durable technological change into overlooked long-term winners
- Difficulty
- Expert
- Time to result
- ~ongoing to results
- Steps
- 7
- Confidence
- 97%
Structural Change Investing starts by identifying persistent forces—such as cheaper computation, improving batteries or genomics combined with machine learning—that can transform the economy. Rather than forecasting earnings, GDP or central-bank decisions, the investor consults scientists, academics and thinkers about change to estimate the technology's rate and durability of improvement. That rate is compared with incumbent alternatives: a technology compounding at roughly fifteen percent against an industry improving at three percent can create a powerful long-term advantage. The investor then traces second- and third-order effects to find the companies best able to shape and commercialize the new environment. Because markets and finance are commonly analyzed as equilibrium systems, major disequilibria can be less crowded fields where both the probability and impact of being right are unusually high.
Origin
Extracted from Masters in Business, where James Anderson described Baillie Gifford's use of academics, scientists, the Santa Fe Institute and long-run technology improvement rates.
Core principles
- 01Structural forces matter more than quarterly fluctuations
- 02Major disequilibria create more interesting opportunities than equilibrium
- 03Scientists and academics provide better checkpoints than market commentators
- 04Improvement rates can reveal which industries will eventually win
- 05Second- and third-order effects often create more value than the enabling technology
How to run it
- 1
Name the Driving Force
Identify a change with the potential to shape the economy for years, such as declining computation costs or improving battery performance.
Pro tip Express the force as a measurable direction of travel rather than a fashionable sector label.
Watch out Do not confuse temporary demand growth with a durable structural transformation.
- 2
Leave the Finance Bubble
Speak with scientists, technologists, economists and other thinkers who study how the underlying system changes.
Pro tip Build recurring relationships so experts can provide checkpoints as evidence evolves.
Watch out Market commentary is often self-referential and may miss the causal mechanism.
- 3
Estimate the Improvement Curve
Assess the likely annual rate, longevity and confidence interval of the enabling technology's progress.
Pro tip Combine progress across several components rather than relying on one technical breakthrough.
Watch out Human intuition routinely underestimates exponential change.
- 4
Compare Compounding Systems
Contrast the new system's improvement rate with the incumbent industry's progress. Patiently favor the side with the persistent compounding advantage.
Pro tip Look for gaps that can persist for a decade rather than marginal annual differences.
Watch out The superior technology may still require years before its advantage becomes commercially decisive.
- 5
Trace Higher-Order Effects
Map how the enabling change affects products, business models, infrastructure and customer behavior. Search beyond the most obvious component suppliers.
Pro tip Ask which companies will use the technology best, not only who manufactures it.
Watch out First-level beneficiaries may capture less value than downstream platforms.
- 6
Find the Shapers
Select companies with the ambition, culture and capabilities to shape the emerging future rather than simply participate in it.
Pro tip Use management conversations and technical evidence to test the link between the structural force and the company.
Watch out A correct technological forecast does not automatically identify the winning investment.
- 7
Filter the Noise
Monitor information only when it changes the improvement curve, competitive position or long-term implications.
Pro tip Write down which observations would falsify the structural thesis.
Watch out Quarterly earnings and macro forecasts can consume attention without altering long-run value.
In the wild
Baillie Gifford sought confidence that the technologies making electric vehicles better and cheaper could continue improving at around fifteen percent annually. Against an incumbent industry progressing much more slowly, that compounding gap supported a patient investment thesis for Tesla.
→ The structural improvement rate provided a higher-confidence foundation than forecasting near-term vehicle sales or interest rates.
Anderson reflected that knowing Moore's law would continue for his career might have been more valuable than most contemporaneous market information. The hard part was tracing cheaper, more powerful computing beyond semiconductor companies into second- and third-order beneficiaries such as Amazon and Google.
→ A durable enabling trend opened multiple generations of investment opportunities.
Common mistakes
Forecasting the Next Quarter
Quarterly earnings and central-bank forecasts usually have little bearing on the long-run value created by structural change.
Stopping at the First-Order Winner
The manufacturer of an enabling technology may not capture as much value as companies using it to build new products or platforms.
Thinking Linearly
People underestimate how repeated percentage improvements compound, causing them to exit transformative trends too early.
Is it for you?
Best for
It is best for curious, patient investors researching technological or economic transformations over many years.
Not ideal for
It is not ideal for investors judged primarily on quarterly performance or those seeking precise near-term forecasts.
From the transcript
“what we're looking for, uh the era defining companies”
“it is trying to think what are going to be the main driving forces of our economy over the years to come”
“this is what I could to spend all my time on thinking about the second third round effects and how you get to the companies…”
From the episode
James Anderson on Why Fund Management Is 'Broken' (Podcast)
James Anderson