Not all dollars are the same; some are for discovery, and others are for deployment
An unflattering but candid description of companies is that they are boxes that print out cash flows, and those cash flows have a certain volatility. Boxes that tend to print cash by producing similar goods in similar ways on a similar schedule get grouped together in what we call “industries”, and putting together the right mix of boxes that offset each other’s volatility in printing cash is what we call a “well diversified portfolio”.
To get these boxes to print cash though, we have to insert capital tokens. Capital tokens can take the form of debt or equity; but the hidden assumption in how much debt tokens or how much equity tokens is really time preference.
Those with a longer investment horizon are more willing to privilege cash flows in the future, and thus a lower discount rate. Those with a shorter investment time horizon are less willing to do so. Beyond how willing an individual investor is to forgo cash flow/dividends/profits, this also means longer term investors are more willing to accept companies that have complex operations. Long term investors have a lower cost of capital, and when blended with a company with a higher cost of capital - due to the types of risks it takes on (volatility to its cash flows) - the investor can still end up in a good spot. Shorter term investors have less of a willingness to tolerate both highly volatile cash flow businesses and complex ones.
There’s a reflexive dynamic to time though. Even though I may be a patient investor, there are environments in which I should be a little bit greedy (bullish) or a little bit more recalcitrant (bearish). Consistent greed is not so good over a long time horizon - pigs tend to get slaughtered as the saying goes.
Technology is one example of a powerful force that can change the environment. The right technology innovations change the operating environment by changing the assumptions underneath entire industries. Changing the default assumption of how much data can be stored by infinite memory databases gives rise to just-in-time supply chains, enabling a whole new class of global firms like Zara, SHEIN, and more.
Source: Benedict Evans; “AI, and everything else”
Importantly, not all technology breakthroughs that change assumptions need to be technically complex. Many of the best ideas don’t sound like big ideas on first pass. Standardized screws were a critical breakthrough that enabled the industrial revolution. Simplifying and standardizing one element frees up resources and attention to focus on what can be built on top, and that can have as much - if not more - of a revolution in an industry than a complex new discovery.
Enter, AI. As people come to understand what it does and what opportunity it presents, there’s a sense that it is evidence of a new environment. AI is seemingly a new S-Curve on which future growth can be built.