The Best Investments Are Out on the Edge
Today’s Risk and Reward is going to show you how truly transformative technologies sneak up on incumbent companies…and wreak havoc.
We’re doing this now because the next few years will be a period of major change in the global economy.
Many investors will have the rug pulled out beneath them…while others make a motza.
It won’t be central banks driving this…or major firms…or even Wall Street.
Major disruption like we’re about to see always comes from the fringe.
That’s why early adopters make so much money…
It takes a long time for a major change to go completely mainstream, and for the investing public to wake up to the fact.
Here’s a taste of that from history…and how it relates to you today.
Honda‘s bumpy rise
When Honda was unknown Japanese company with poor sales
In 1959, a man called Kihachiro Kawashima left Japan to live in Los Angeles. His job: Find a way to sell Honda motorbikes in North America.
This was long before Japanese brands took over the US. In fact, the budget was so tight that Kawashima shared an apartment with two colleagues to save on expenses.
Honda also gave each man one of its extremely basic ‘Super Cub’ motorbikes to get around town on the cheap.
This would have astonishing consequences down the track, which helps us see a massive opportunity brewing right now.
In Japan, those Super Cub bikes were mostly used to make local deliveries in congested urban areas. Like Honda itself, the bike developed out of the ashes and poverty of the Second World War. It was cheap, but durable.
The popularity of this basic bike in Japan gave the young and tiny Honda company the scale and revenue to invest in expansion and grow its production expertise.
And so a future icon of the auto industry was born.
By 1959, Honda was ready to use Japan’s low labour costs and cheap currency (much like China years later) to crack the richest country in the world: The United States.
But the US market was different…
Americans liked to use their motorcycles for longer distances, and prized speed, size and power. This was long before Harley-Davidson cultivated its ‘outlaw’ biker image, but, even then, you could see the antecedent for this.
Honda duly built a motorbike for American tastes.
Kawashima’s job in 1959 was to market this to a buying public unfamiliar with the brand and the model.
It was a disaster.
Dealers didn’t want to carry the stock. Honda’s engine didn’t last, and parts wore out quickly. Sending replacement components from Japan to the US cost Honda a fortune. The only appeal to a buyer was how cheap the bike was — hardly a recipe for sustained success.
The US buyers preferred the established brands of Harley-Davidson and BMW.
Kawashima grew more dispirited. One day, he took his Super Cub — the Honda bike popular in Japan, and not the one built for America — for a spin in the hills east of Los Angeles.
His colleagues soon joined him to go ‘dirt biking’. Soon people were asking where they bought the little bikes, so they could ride for fun like this too.
The Honda men put a few orders in and had some shipped over from Japan. Honda’s management didn’t pick up on this small signal, and continued to try and sell Honda’s bigger, ‘American’ bike — unsuccessfully.
Eventually, Honda’s management twigged that perhaps America offered a market for a small, recreational bike, which Honda could dominate instead.
They put some money behind the idea. They began promoting the Super Cub.
A student came up with an advertising slogan that went on to form the basis of Honda’s marketing for the next decade.
From this unforeseen string of events, the Super Cub has now been in continuous production since 1958 and hit 100 million units in 2017. Honda today is the fourth biggest auto manufacturer globally.
Why am I telling you this? Clayton Christensen relates this story in his classic business study, published in 1997.
Look to the edge
Disruption comes from the edge of the bell curve.
Christensen was bringing this example up to make a broader point. It actually isn’t the serendipitous success of the Super Cub.
It’s how Honda’s rivals ¬— Harley-Davidson and BMW ¬— lost their market leadership in motorbikes at the time from this random development.
It wasn’t that either of these two firms missed the success Honda was soon having with the Super Cub.
Harley-Davidson soon produced a rival small bike. But Harley’s dealer network preferred to sell the bigger bike. And here’s the kicker: They did so for the right reasons.
The big Harleys were more profitable, and appealed to the core customer base.
But here’s the catch.
The success of Honda’s Super Cub gave Honda cash flow and capital to expand into higher end bikes with more powerful engines, which soon eroded Harley-Davidson’s core market.
Christensen calls this dynamic the ‘innovator’s dilemma’.
Successful companies can do everything ‘right’ and fail, or lose market dominance.
That’s because niche and disruptive products usually come into being, and thrive, on the margin.
They spring from new markets, or ways of doing things, that big companies are not exploring because their expertise and business strategy are focused elsewhere.
The profits on these marginal products are normally low at first, and will go through many different iterations and cycles as developers iron out the kinks.
And the established companies usually have customer bases that don’t need or want this type of product anyway.
Until they do.
Then suddenly the marginal product becomes significant and unstoppable.
Americans didn’t know there was such a thing as dirt biking for fun until the trend took off, and Honda was there to meet them with a bike they could easily buy.
From this, we can see how small competitors arise in areas that are adjacent, uncontested, neglected or underserved.
Once a small company has established a base, it can expand into many different areas that can bring bigger players down…
Only this time, it isn’t small Japanese motorbikes coming out of left field…it’s small stocks with one thing in common…
Maybe you’ve already guessed…
Blockchain: How this global disruption grew from a 2008 whitepaper
The blockchain did not come from Apple or Google or Amazon. It came from an obscure whitepaper released in 2008…and a man (or woman) whose real name remains a mystery.
Bitcoin has the world’s first blockchain, but now the technology is expanding all over the world in a myriad of different ways.
This is going to the very heights of power.
The Bank of England even considered creating a digital currency tied to the pound.
Russia is also considering a ‘crypto’ rouble in order to evade US sanctions.
Any stock related to blockchain has run hard in both the US and Australia…no matter how tenuous the connection.
We already know about the astonishing gains happening in cryptocurrencies.
Steve Wozniak, the co-founder of Apple, was in Australia late last year. He predicts blockchain will change everyone’s lives in the same way Apple has already done.
He said: ‘The outstanding things in life come out of nowhere, and right now with blockchain it’s wide open.’
This is the trend that will crack open the world economy over the next few years.
It’s going to take stock markets around the world to new heights…and will bring big profits to nimble investors.
Companies that adopt and flourish with this will become like Honda did after 1959…others will stumble and lose market share, if not become completely redundant.
These things can happen so fast. Nokia and Blackberry, for example, were at one point synonymous with mobile phones.
The launch and success of Apple’s iPhone shredded their market share and revenues. They’ve never recovered.
This is the same thing I expect to see in the next few years as the blockchain rolls out across the world.