Thursday, June 4th, 2009
Riding the gales of creative destruction
I’ve been reading the draft volumes of one of my favourite economists, Deirdre McCloskey. She is writing a four-volume tome on bourgeois virtues (basically middle class, commercial, merchant virtues). McCloskey attributes the industrial revolution – and the amazing economic growth it spawned – to business life of the bourgeoisie suddenly becoming respectable in the 1800s.
The basis of the bourgeois life is innovation. McCloskey’s work makes a lot of reference to Joseph Schumpeter, the Austrian-born economist. Schumpeter theorized that the entrepreneur is the central player in capitalist economies; their innovations drive relentless growth and also create the business cycle.
Schumpeter coined the well-known phrase ‘creative destruction’: entrepreneurs innovate and create new products and enterprises. That spawns imitators and eventually booms. The destruction comes both when the boom busts, but also the destructive impact of innovation on existing businesses.
What has this got to do with trading?
It got me thinking that aggressive-growth/momentum traders are essentially riders of the gales of creative destruction.
The goal is to seek out innovation; to buy entrepreneurial companies that are growing rapidly and changing people’s lives; companies that have created innovative new products and services. Google is a prime example; it is creating new products, but they are also destroying old ones like newspapers.
We can identify the innovators by accelerating growth in earnings and sales. Genuinely successful innovators are producing sales and are not just speculative like most biotechs, tech companies and mining explorers. The fact that something big is happening shows up in their strong price action.
But as Schumpeter noted, innovators eventually lose their edge when they stop innovating and when others adopt their creations. So aggressive growth investors have to be mindful that growth stops; you have to be prepared to hop off before things – company performance and the general market – implode.
It’s a tough thing to do. But it’s also worthwhile. Aggressive growth investors are partners with entrepreneurs, allocating capital to them when they are growing fastest and need it most. It is a crucial role in entrepreneurship and innovation – the essence of capitalism which has pulled most of the world out of extreme poverty.
Word Count: 354. This entry was posted on Thursday, June 4th, 2009 at 3:15 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
