Mapping Emerging Scarcity

What investors take for granted as investment ‘quality’ reflects both long accepted wisdom about where scarcity exists, such as distribution moats, brand, patents, and an unstated assumption that these points of scarcity remain unchanged. Instead, it seems likely that extreme changes in marginal costs wrought by technology are forcing a reconfiguration of existing business models.

This essay is an attempt to tie those ideas together to identify where the next great businesses might emerge. Amidst a changing investment environment which lacks historical analogues the challenge for investors is identifying profit pools prospectively.

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The Investment Paradox of Software

The period 2014 to the present has been one of soul-searching for value investors as many formerly successful fund managers retire following stagnant performance. Commenters increasingly describe a market rally that is remarkably narrow in breadth led by FANG (Facebook, Amazon, Netflix, and Google) and other software-driven technology stocks which trade at valuations which appear unhinged from traditional cash-flow based valuation metrics. There are several possible explanations for value investors' under-performance: more competitive markets, diminished information asymmetries, a venture capital bubble, or changes in business models, especially in terms of technology and intangible assets. Yet, there is also some historical evidence that our current tech-dominated market indexes may simply reflect the out-sized importance of software in emerging business models

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