Modern Creative Destruction, Banks Post Good Earnings, And De Tocqueville

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process.  Joseph Schumpeter

Creative destruction describes the deliberate dismantling of established processes in order to make way for improved methods of production. The term is most often used to describe disruptive technologies such as the railroads or, in our own time, the Internet.

Over the course of our lives, at any particular moment, there are specific instances of creative destruction potentially taking place. Right now, the most obvious one is the question of electrification in the transportation and power markets. The transition to electrification in the automobile market hasn’t been rapid, with electric cars having a total market share in 2019 of 1% (entire market) with 2.6% of global sales. Year over year sales increased 40%, according to the IEA.

Investors believe electric and hydrogen based vehicles will displace the incumbent, internal combustion based automobiles, and do so in a short period of time. Current market prices for those segments, especially Tesla and others, reflect this idea, as do the values of traditional automotive manufacturers. Oil and gas providers and their depressed stock prices are also evidence of this thesis. The important consideration for investors is the accuracy of this prediction, will it take place, and if so, how rapidly? Given the amount of capital at stake, and the conclusions many have already drawn, creative destruction requires serious thought and analysis. Let me share a real life example and what has to be considered.

A few years ago, a high-profile startup in Silicon Valley was considered the leading contender in the health care area of diagnostic testing. The existing public companies in the diagnostic area were sold off on the thesis that the startup had superior technology. The startup had a charismatic founder, partnerships with leading pharmacies and retailers, and plenty of media attention.

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Disclaimer: Thanks for reading the blog this week and if you have any questions or comments, please email me at Y H & C Investments, Yale Bock, and the family of Yale Bock ...

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