Why are we talking about the future of work (FOW) as an investment metric? Profitability in business is often dependent on a company’s ability to adapt to changing circumstances. The nature of work, particularly in the United States and other developed nations, was beginning to change prior to 2020. The pandemic simply accelerated trends that were already in motion.
Advanced technology, increased globalization, and remote workforces are three of the driving forces in this most recent evolution of modern business. The lines we once drew to separate equities into market sectors are being redrawn to reflect the widening gap between land-locked and virtual companies. Growth is no longer measured in square footage.
Redefining the Scale of Economies of Scale
Economies of scale are defined in microeconomics as companies with the ability to produce goods or services on a larger scale at a lower cost. Examples of this in manufacturing include lowering materials costs through bulk ordering and increasing production with upgrades to machinery and technology. If demand increases, additional workers are added.
Artificial intelligence (AI) has changed the rules. Time-consuming tasks once delegated to humans can be performed by AI in a fraction of the time at a much lower cost. Industrial robots have replaced assembly line workers. Line supervisors are being retrained to monitor production remotely. Getting your hands dirty only happens if you eat a messy lunch.
This is all very much the future of work, and it’s changing the scale of economies of scale. Like the ever-elusive “ten-bagger” in the investment world, companies with the right technology are now able to increase profitability at rates never seen before. It just takes the right product, a process that works, and the online bandwidth to handle the software.
Landlocked vs Virtual: One is Not Like the Other
An apple can be compared to another apple, but a banana is a different fruit. There are individual companies currently bundled into the same market sectors that don’t look anything alike. Let’s use the energy sector as an example. Some companies market digital solutions and virtual service models. Others mine coal. Who do you think scales faster?
The disparity inside market sectors increases dramatically every time new tech is introduced that can automate and enhance production and distribution. The technology (IT) sector was split in two when crypto came on the scene. Mathematics of scale, even in a sector accustomed to accelerated growth, forced investors to treat crypto as a separate asset class.
Blockchain, cryptocurrency, and decentralized finance (DeFi) in general have helped spark a long-overdue conversation in the investment world. With advanced technology increasing the profitability of some, but not all companies, how can we continue to generalize investments into the sector “boxes” that are still widely accepted in financial circles?
The Future of Work in the Metaverse
Science fiction often becomes science fact once enough time has elapsed. Not to burst your bubble, but the Metaverse was not created by Mark Zuckerberg. The term was first used by Neal Stephenson in his 1992 science fiction novel “Snow Crash.” The concept has been in development since 1968, when Ivan Sutherland produced the first “V/R headset.”
The Metaverse is already an active playground for online gamers and a new frontier for investors looking to strategically position themselves for the growth spurt that appears to be inevitable. Virtual “real estate” firms are currently selling Metaverse “properties” using blockchain technology to transfer deeds and NFTs as a store of value.
The 2020 pandemic proved that businesses could operate with remote workforces. Many companies chose not to go back to brick-and-mortar office space because running virtual teams was simply more cost-effective. Zoom and Google Meet have become the new corporate conference rooms. Imagine all that with 3D imaging and sensory controls.
The Role of Fundamental Analysis in Portfolio Construction
Studying the future of work (FOW) and how it will affect certain industries and companies is an example of fundamental analysis. Active investors and traders use fundamental analysis to predict which stocks are more likely to be winners. Passive investors use technical analysis, which is a reliance on past performance to predict future price movements.
Charts and graphs of past performance are great for reporting, but dramatic changes in the business world have made it impossible to count on yesterday’s market trends to predict what will happen tomorrow. Tactive advisors use fundamental analysis when constructing their models. If you’re self-managing your investment portfolio, you should do the same.
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