How do companies act when they are being existentially threatened by new technology? There’s a big difference between a stock worth buying and a stock worth owning, and we’re undoubtedly going to see a lot of the former in AI disrupted companies…but it’s more difficult to determine which names fall in the latter. When we look at the recent past for example, we see something of a gradual cycle in which it “becomes obvious” a company has been disrupted, everyone sells. Then that overextends the stock to the downside relative to current fundamentals (or relative to headlines announcing the companies are taking measures to adapt), at which point dip buyers come in. In the examples of real disruption, it corrects back to a trend, but the cycle restates itself and the trend proves to be a downward one on a long enough timeframe (downward can also simply be massively underperforming the index by going sideways for a decade). The insidious nature of these names is that technological disruption manifests first as multiple compression, current earnings tend to look reassuring and near-term analyst expectations tend to overestimate the impact (and under-estimate in the long term). This results in better than expected results that can mask the competitive damage. These rebounds don’t actually prove the preceding selloff overshot fair value, and the rally tends to be overly optimistic on what future life should be assigned to today’s profits. Two classic and relatively recent examples. Macy’s had two of these moves. +58% in 2016 and +148% in 2018. But across 2015-2019 the shares still declined -67% compared to SPY’s +73% gain. In 2016, there were skeptics regarding the extent to which e-commerce’s growth sounded a death knell for brick and mortar - after all, malls had been a mainstay of the American town for decades. By 2019, it would be a difficult task to find an investor who owned Macy’s on the thesis that Amazon’s disruption to the company was overstated. And it’s not like these rallies were on pure sentiment shifts. In 2018 same store sales rose 2% YoY. Apple unveiled the iPhone in Jan 2007, BlackBerry’s stock price peaked in 2008 but its revenue didn’t peak until 2011. And even if you shorted the revenue peak you still had to sit through a rally where it tripled on its way to declining 95% by 2013. The most tricky aspect seems to be when companies present as having adapted but, for any number of reasons, can’t actually manage. Kodak, for example, had shifted mix to a majority digital (54%) by 2005. But that simply was no match for the hit to the amazing recurring revenue of the film/processing model. Adding new technology doesn’t make up for losing the disrupted profit pool, especially when it transitions your business model to a less favorable or competitive one. In 2010, Kodak jumped 30% on quarterly numbers signaling a turnaround on lower costs, printer sales and licensing income. They filed for Chapter 11 in 2012. Ive been thinking about what we can we do to avoid falling into the same traps while also not being blind to the potential for real opportunities in poorly understood disruption. Hard to answer without sounding cliche or generic but… At least for now, “having/using AI” is not a solution. That will be the default for every company on earth soon enough. The questions that matter are more nuanced: Do customers still renew? Does pricing hold? Who owns the customer relationship? After the new costs and old cannibalization, does the new strategy/product even replace the old profits? It’s going to be pretty difficult to differentiate the incumbents that deserve to rebound from the ones that don’t but at the very least I’m taking notes as things play out.

Oh it’s actually over you don’t understand I recommend re-reading everything @citrini wrote about friction economics 2027 will have ridiculous earnings volatility from pent-up consumer demand rerouting to crazy places

Agentic Reality: The Ramifications of Widespread Agentic Adoption 3 years ago, we wrote a piece titled "Less Deus, More Machina" that explored the clear cut losers of AI when it was still just a chatbot. Now, we're revisiting that exercise as agents go from novelty to reality.

25 AI losers in a short basket, 3 years later SPY +75% and our basket down -38%. You can see on the chart the July 2023 short squeeze where everyone said how crazy it was people actually sold these names on AI risk. Luckily, that kind of reaction never happened again.

There’s no way any of us can predict the impact that AI will have on companies, sectors or consumer behavior (which has been, for all of history until now, human behavior). But to claim that it won’t have an impact and simply brush it off lacks both humility and creativity. Tactics that worked when consumer behavior was dictated by human psychology will fall by the wayside, and those that fail to adapt will be left behind. Every day from now on we will see new examples of areas where friction was profitable becoming cost centers for companies that don’t react in a timely enough manner. Today you might realize just how many flight credits, loyalty points or promotional offers you’ve never used that will end up utilized by agents. What impact will that have? Tomorrow, you might see something that makes you ask how much money health insurers make simply because people won’t sit on the phone for 5 hours trying to get coverage approved unless it’s a massive expense and/or life or death matter. What about your savings account? That money could be in a money market fund, but you haven’t bothered to move it. How much in net interest income is made because of that friction? The coming years will be some of the most interesting for investors who are intrigued by paradigm shifts and their ripple effects. I, for one, could not be more excited to see how it all plays out and invest through the changes.

In June 2024, I was on Odd Lots talking about consumer agents & Apple’s potential leg up due to trust. @TheStalwart said flatly that nobody cares about privacy. After watching everyone give their email, messages, credit cards, location, screen access and logins to both Instinct and Muse, I gotta say… Good call, Joe.