Disruptive Technology

A new technology is invented that makes producing a product quicker or cheaper, and the new technology renders an older technology obsolete. It’s a story that has happened throughout history. Autos and trucks supplanted wagons pulled by horses. Planes supplanted trains – for some uses, not all. Austrian and Harvard economist Joseph Schumpeter used the term “creative destruction” in the early 20th Century to describe this process. In more recent years, another Harvard economist, Clayton Christensen, used the example of how steel companies recycled steel to make rebar, and thereby disrupt the steel industry by lowering input costs. Disruption can happen through products or processes. As an investor, think about companies who are doing the disrupting vs. companies whose products or processes are being disrupted by new products or processes. Invest on the side of the disruption.

Legg Mason

Disruption is happening in the financial services industry. The latest example is the tribulations of Legg Mason, a well-established investment management firm, famous for its mutual funds. Legg Mason’s core mutual fund business is being disrupted by alternatives such as low- or no-cost ETF’s as well as by the stable of funds available through Vanguard, Schwab, and the like. More and more, investors don’t see the value in investing through Legg Mason when they can get the same basic products with similar or better performance through Vanguard. As a result, Legg Mason is losing assets under management to Vanguard (and Schwab and other similar firms). Legg Mason is publicly traded, and it’s stock took a big hit with the 2008 Financial Crisis and has never really recovered. Legg Mason’s stock is down about 50% since its pre-financial crisis high. Now Legg Mason is in a control battle with hedge fund Trian and its takeover-experienced leader Nelson Pelz. I don’t see Pelz’ wisdom in this – he is, after all, the guy who has lost an estimated $1 Billion in General Electric over the past several years (according to Fortune magazine). However, perhaps there is light at the end of the tunnel if a few things break right.


My point is that you should look at a company or an investment from the standpoint of, “Is this a disruptive company?” or “Is this a company that is vulnerable to disruption?” Most times, it makes sense to invest with the company that is the disruptor, because if they truly have a cheaper or better product or process, the world will eventually come to them, though it may take some time to do so. Stocks in disruptive companies usually don’t come cheap, at least from the standpoint of P/E ratio. However, it is probably better to be on the side of history, despite the price. Not all disruptive technologies or companies will make it – for instance, the jury is still out and will remain so for Tesla. So, don’t bet the farm on any one disruptive technology. Even Elon Musk, CEO of Tesla, has diversified, via SpaceEx, the Boring Company, and other smaller ventures. Not all individual companies will make it, but disruptive technologies and processes will always be a thing and you can make good money following these disruptors if you do it the right way.

Technology and Inflation

Vanguard posted this interesting article on May 30, 2019, titled “Amid tight job market, tech drives low inflation.” The article contains a chart that shows that core inflation has been below the Federal Reserve’s 2% target for most quarters during the past 20+ years. This period has coincided with the explosion in technology and the advancement of innovations that have aided productivity. As technology has grown and improved, inflation has been kept at bay, and interest rates have remained low.

The Cost of Technology has declined significantly

Sectors Affected

The Vanguard article also has a chart that shows various sectors of the economy and how much they calculate each sector has benefited from improved technology. The single sector that has benefited the most is, not surprisingly, the information technology sector. It makes sense if you think about it. Consider the computing power contained in a new iPhone today vs. its power when it was introduced back in 2007. The new phone may cost 3 times as much as the 2007 model, but you are getting over 30 times the amount of RAM and storage capacity (source: Computerworld.com). IPhones have over 10 times the capacity of a Cray Supercomputer from 35 years ago. Moore’s Law, in the flesh. It’s not that we are spending less for our iPhone (and laptop) units, it’s that we are spending a lot less per gigabyte of computing power. The more power we have, the less likely it is that inflation rears its head.

Among the other sectors Vanguard analyzed, the two most affected by improved technology are Professional Services and Manufacturing. Think about how more advanced banking and finance (included in Professional Services) are now compared with 20 years ago. Technology has transformed stock trading, to name one example, so that it is now seamless and very cheap to invest your money. As to the manufacturing sector, there is a lot of talk about robots and how they will displace so many workers, but the effect is that manufacturing automation has kept prices very low.


It is not the point of the Vanguard article, but another reason inflation has been tame for 20 years (and more) has been globalization. The expansion of the manufacturing base to other, low labor-cost countries throughout the world has meant that there is competition for manufacturing plants. With increased competition, the cost of goods manufactured and sold has remained low. Do you think we are anywhere near a point in this world when we are maxed out on production capacity? I don’t think so. Tariffs aside, there is no evidence that we are about to embark on a period of higher cost of manufactured goods.


As long as inflation remains as low as it has been for the past 20 years, we are well-set for further economic expansion, in the largest macro sense. Technology has played a big role in keeping inflation low, and I don’t see any reason why this trend should not continue in the next 20 years. Does this mean the Federal Reserve should change its policy toward interest rates? Not necessarily, but I do believe that the Fed’s ability to tweak the economy by quarter-point changes in the Fed Funds rate are overrated, and that investors should look beyond what the Fed does and instead consider the effects of continued exponential improvement in technology and what that may mean for the long-term trend in inflation.

Libra and Stablecoins

Facebook (FB) has announced it will move forward with a new cryptocurrency it has named Libra. Although it will be based on blockchain technology, as is cryptocurrency leader Bitcoin, Libra will differ from Bitcoin in that it will be a “stablecoin”, meaning its value will be pegged to other currencies and thus will be much more stable in value than Bitcoin. Why is it important that Libra’s value remains relatively stable? Because Facebook envisions that its users will use Libra to pay for real things. If Libra’s value remains stable, people will be more likely to use it as intended. There are stories out there of early Bitcoin owners paying for coffee with Bitcoin when Bitcoin was valued at $50 or less, prior to its explosion in value to $20,000 (1 Bitcoin is now worth about $9,000). Imagine how foolish the people who bought coffee for Bitcoin feel, now that Bitcoin’s value is where it is! If people think that Libra’s value could follow the same path, they would be much less likely to use it. Facebook wants people to actually use Libra rather than to buy Libra and hold on to it, and so that’s why they created Libra as a stablecoin.

Upend the Payments Market

One thing I enjoy about the financial media, in particular, is its wild speculation about new products and how they will take over the world. For Tesla, for instance, the speculation was that people would soon be buying electric cars en masse and the internal combustion engine and fossil fuels would become obsolete. Now, electric cars have made good progress, but they are a long way from supplanting traditional cars and trucks. Now we have the introduction of Libra, and the press is speculating that Libra could take the place of traditional payment methods such as credit cards (cash being already too-20th Century to be cool). Maybe this is Facebook’s “in its dreams” goal, but I’m guessing Facebook is really thinking, “Let’s introduce this, see how it works, maybe make some tweaks, and go from there.” No world domination just yet, but it is a thought out there.


One of the appeals of Bitcoin and other cryptocurrencies is that transactions would be secret, and not traceable. Now we have Facebook, a company that has been ripped in the media for lax controls on secrecy and data and identity confidentiality, to say nothing about fake accounts, getting involved with a product that is appealing because of its secretive nature. Put me down as a skeptic that Facebook can pull off this secrecy aspect of Libra. To that end, Facebook has put together a governing board of other companies to try to establish that Facebook alone won’t control your data. We will see how well this goes.


I believe it is a smart move by Facebook to create Libra as a stablecoin if Facebook wants people to use Libra to buy stuff. Facebook will have to work on making sure the purchasing process goes smoothly, because, with Bitcoin, the purchasing process is not smooth. If all goes well, Libra could be successful, but I believe it will take much more than Facebook and its crony partners to truly upend the payments system in the United States. A good chunk of the established system of finance stands to lose if Libra is successful, meaning that these established banks and the like will have to jump on board or adapt themselves. Then there are all of the regulatory bodies of the US Government; let’s see how that plays out. If you want, go ahead and buy some FB, especially if you can afford to lose some money. After all, FB isn’t a pure play on cryptocurrency – they also have a social network, as you might recall.

I relied heavily on this article in the Washington Post and this article from the Wall Street Journal to write this blog post.

Cup and Handle Pattern

Today I will go into the “Cup and Handle” pattern, which is a chart reading technique that may or may not help you on the road to riches. I don’t advocate its usefulness one way or another, but you should be aware of it because you may be looking at a stock chart someday and think you may see the cup and handle, and you may be right, or you may be wrong.

Mastercard Stock shows Cup and Handle Pattern


The chart above is an example of a cup and handle pattern. The cup is the u-shaped formation underlined in blue, and the handle is the relatively short period outlined in blue wherein the stock reaches back to its high and then sells off slightly. Proponents of the cup and handle will tell you the time to buy is when the stock reverses its “handle” sell-off and then breaks above its prior high. In this chart (of Mastercard stock a couple years back), the buy period is in late August or early September, if you can read the dates.


One key of making use of the cup and handle pattern is patience. You need to wait for the pattern to develop. Think about the National Football League, when the commentator says the running back needs to be patient and wait for his blocking to develop. It might have been tempting to buy when the stock began to retrace gains it had made early in the chart – during what is called the “consolidation” phase of the stock. If you did buy during consolidation, you may have made out ok, but you may also have had to wait a while before you were proven right. The psychology behind it is that investors make money on the way up (early in the time period shown in the chart), then do some profit-taking perhaps because they see other, better opportunities out there. When old investors sell, new investors come in, while the company keeps improving its profits and cash flow. As the consolidation phase gets later in the cycle, the new investors hold on because they haven’t made their money yet. That’s when the handle forms, and then the company makes new highs (according to cup and handle proponents).

More Patience

You can see from this chart that it takes weeks and months to go through the consolidation phase and to form the cup and handle pattern. If you are a short-term or even a day-trader and you see a pattern that looks something like a cup and handle, it isn’t. Your eyes are deceiving you. Although the emotional cycle of an investor has admittedly been sped up in recent years, a true cup and handle takes a long time to develop and is not a pattern to be used for day trading.

Investors Business Daily

One of the main proponents of the cup and handle pattern is the newspaper (now website) Investors Business Daily and its founder, William O’Neil. IBD puts on one-day training sessions and teaches how to look for and use the cup and handle as its main trading tool. IBD claims to have tested it and it works – that’s their claim, not mine. That said, IBD does a great job identifying stocks that tend to go up over the long term. I am an IBD subscriber, though I don’t trade based on their cup and handle recommendations.


Again, my only objective is to educate my readership about cup and handle patterns and to recognize one when you see one, when you are spending time inputting stock ticker symbols into free stock chart websites such as stockcharts.com or finviz.com. Make sure the pattern you see has taken weeks or months to develop because, even today, that’s how long it takes for investor psychology to evolve from a profit-taking phase to a more long-term hold phase.

Active vs. Passive Investing

This blogger believes, despite the title, that Active investing is not dead – it is just out of fashion now because we have been in a long-term uptrend in the stock market for the past 10 years. He believes the flow of funds from Active to Passive investments will reverse itself if and when the market goes through a several-quarters-long tough stretch. I understand the blogger’s point, but I don’t fully agree. I believe there is always a place for active investing, but the active investor really has to know their business.

Active Investing

Active investors try to beat the S&P 500 return (usually) by attempting to buy undervalued assets at a good price and then selling them at a higher price. The Strong Theory of efficient capital markets hypothesizes that this can’t be accomplished, but there are investors out there who have done it, perhaps only for a relatively short span of time. The most well-known Active investor out there is probably Warren Buffet. Buffet’s (and Berkshire Hathaway’s) advantage is that they have enough cash to purchase entire companies, rather than small-lot shares of companies. They thereby control the cash their investments generate, which is not the case for the ordinary investor. Anyone who dabbles by buying individual stocks believes that their stock picks will outperform the general market, and so they are inherent believers in Active Investing. “Active” is different than “Activist” investing. The latter type of investor tries to influence corporate decisions in some way – think of Carl Ichan trying to oust various corporate management teams.

Economist Joseph Schumpeter coined the term “Creative Distruction”, meaning that new technologies or processes constantly supplant old ones, thereby rendering the old ones obsolete. Creative Distruction means that there will always be new up-and-coming companies out there growing their profits, taking away from older companies, while growing the overall economy in the process. The creation and the destruction means there will always be opportunities for Active investors if they correctly foresee the Creative Distruction. It so happens that most of the “creation” in recent years has been by tech companies. The high cost (in terms of price to earnings or price to sales) of these tech companies is off-putting to traditional Active investors who tend to be more value-driven. Nontheless, Active investors who have been on top of the “tech wave” and “FAANG” stocks have done well in recent years.

Passive Investing

Passive Investing means you buy index funds. You may tinker with allocation levels among different funds and different asset classes, but you are not trying to pick individual stocks. This type of strategy is lower maintenance, lower cost (in terms of fees and commissions paid to fund managers), and it fits with Modern Portfolio Theory and the Efficient Markets Theory, which posits it is impossible to outperform the index.

It is true that most stocks are correlated, and if it is theoretically impossible to outperform the market, you may as well join in and invest in index funds. It is also appealing to save money by investing in low-cost Index ETF’s through the likes of Vanguard. Also, if you have a day job and a family, then use your mental energy for those tasks rather than looking at your investment portfolio every day. Index ETF’s are a great innovation – themselves evidence of Creative Destruction in the financial services industry.


My point is to educate you about Active vs. Passive investing, show some examples of each, and get you to think about how you invest in what you invest in within the framework of Active vs. Passive. It may not be “cool” or “macho” to think of yourself as Passive, but it is probably the best way for you to achieve your financial goals.


Everybody in my city seems to be wearing Lululemon clothes. By everybody, I mean almost all women and some men. Lululemon just moved into a huge new spot in the shopping center nearest me. Despite that, during busy times, lines form to get into the place. “Athleisure” wear may be the bane of fashion designers but it is a huge hit among the general population. Lululemon is the best in class.


Lululemon is based in Vancouver, B.C., Canada 21 years ago by a man inspired to make superior yoga clothing. It quickly expanded to sell all types of workout clothes for women and for men. It tapped into the “Community” and “Culture” notions of shared experience among its customers such that customers feel like they are part of something larger through buying and wearing Lululemon clothing. In addition to its community and shared experience, Lululemon differentiates itself through its commitment to a quality product, patented materials, and innovation as demonstrated by its drive to expand the market for yoga-based clothing.

Stock Price

Lululemon IPO’d at $18/share in July 2007. At its current price of about $168, that means Lulu’s annual return is in the 20%-range – an outstanding investment if you bought at the IPO and held on all of these years. It has grown from a single store in Vancouver to a company with a market capitalization of about $21 Billion in 21 years – perhaps not the compounded growth rate that Facebook has had but a tremendous success story for a traditional apparel company.

Lululemon Monthly Stock Price (from Finviz.com)

The chart above is a Monthly chart going back to early 2011. You will note that Lulu traded within a range of between $40 and $80 from 2011 to 2018. It was thought perhaps to have topped out before breaking through in early 2018 and reaching its current high level. Lulu currently trades at about 44 times current earnings and almost 30 times projected earnings, so it is expensive even for a growing company. Would I buy it at this price? Yes, but I wouldn’t bet the farm on it, and I would own it as part of a diversified portfolio. The market is not saturated with people wearing yoga clothes, especially considering overseas markets, and so I believe there is plenty of room for Lulu to grow.


I admire great, new, innovative companies and the entrepreneurs and management that have led their growth. Lululemon’s management has aligned and has created a bond with its customers and its community that has driven customer loyalty, such that Lululemon clothes are the staples of many of its customers’ wardrobes. I will be interested to see if Lululemon can continue to capture the same market segments as it continues its international expansion.

I don’t own Lulu (directly – I do through mutual funds and ETF’s), and my opinions about the potential future performance of Lulu stock is worth what you have paid for it. That said, if you are interested in more “top down” analyses of individual stocks such this, please contact me and we can perhaps come to some arrangement.

Wins Above Replacement

Major League Baseball has a relatively new statistic called Wins Above Replacement, or WAR. WAR attempts to quantify the value of each individual player by determining how many team “wins” that player is responsible for relative to a replacement player whose statistics and metrics are the league average for that position. For a player, any WAR number that is +1 or above is good because it means that player is better than the average player. If you are a player and your WAR is +5 or more for a season, then you are likely one of the top 30 players in the league: an All-Star or an All-League player. Other sports have similar metrics, but it is most advanced in baseball.

Suggestion Box

I was speaking with a good friend who just visited me, and we were discussing how companies value their employees, and that while some employees are overcompensated, others, especially employees who develop new ideas that result in higher profits and/or lower expenses for the company, are undercompensated, sometimes vastly so. My friend provided an example of a company that had a Suggestion Box and paid $25 to an employee whose suggestion was implemented. That’s a great “bang for the buck” way for that company to get good ideas from the workers in the trenches!

WAR for Business

That conversation made me think of WAR in baseball. The idea of WAR is to quantify the value of each player. Is there such a thing in business? Can each employee of a company have a “Value Above Replacement” quantity that clearly states how well this employee has performed, or how much better or worse this employee is relative to an “average” employee in the same position? At this point, the answer is that there isn’t such a quantity, but I would not be surprised if we move in this direction, because other businesses, especially sports and entertainment-related businesses are moving in this direction. MLB players whose WAR is 5 or above sign contracts worth $10’s of millions or more. Actors whose films or shows have higher ratings or box office numbers can command much higher contracts for their ensuing work. If an employee of a company can definitively demonstrate that their work has resulted in more revenue or fewer costs for their employer, why shouldn’t they have the right to share in the increased net profit?

Stock Options and Profit Sharing Plans

Some companies already do have plans to share profits through stock options and/or profit sharing plans. For public companies, stock options have been a thing for many years, but recent regulations have made it more difficult and costly for firms to issue some types of options. For private companies, profit sharing is still done, but such a plan requires the willingness of the employer to offer the plan. Also, plans such as 401k matching and bonus plans also work toward sharing corporate profits, and Performance Review grades are a way of assigning numbers to employees. However, Performance Review grades are good in that company but may not translate to another company.


The point that I want to make here is that each employee should think in terms of the concept of WAR, meaning how do I, as an employee, do a better job than another “average” employee off the street would do? If you approach your job with the mentality of “how can I do a superior job?”, then you will do things like take ownership of problems your company may face, or try to make your direct boss’s job easier. It will also hopefully raise your mental state above just going in and doing your job every day into thinking about how you can be a superstar. In terms of financial planning, there is no financial plan better than attempting to do your best at work and to try for the highest salary, bonus, stock options, or other profit sharing concept your company might have. Because, as well as you do this year, you will then probably build on it next year and thereafter, and before you know it, you will have exceeded your financial expectations that you had when you started out.


If you are looking for an easy way to open up an account and to invest in the stock market, try Robinhood.com. It’s so easy, you can do everything from an app on your phone. And, if you keep to the basics of trading stocks or ETF’s without using margin, you will pay $0 commission! Free access to financial markets – it doesn’t get much better than that!

Invest Commission-Free on Robinhood.com


Robinhood was designed from the beginning to be used primarily via a phone app. They are thereby appealing directly to the Millennial Generation – a good idea since they are younger and more likely to remain customers for a longer period. Millennials do everything else through an app; why not investing? However, if you download the Robinhood app, you are asked to input your email address right away, prior to being able to explore the site. So, it is maybe best to explore the website first through your computer prior to downloading the app on your phone.

Business Model

Robinhood believes that it can make money without charging commissions because Robinhood doesn’t have the internal entrenched overhead expenses that other brokerage firms have. Instead of through charging commissions, Robinhood makes money through three different revenue centers:

  • A $5/month subscription service called Robinhood Gold which offers margin (the ability to use leverage in your account) and other higher-level features, plus additional margin interest Robinhood charges above $1,000 initial margin interest.
  • An interest rate spread – the difference between the interest it makes vs. interest it pays out on money deposited with Robinhood – much like any other bank; and
  • Trade rebates from market makers and trading venues.

I’m guessing that the additional margin interest and the interest rate spread are where Robinhood makes the bulk of its money. You can see that if you don’t trade on margin, you really can trade commission-free!


Vanguard seems to be the closest competition to Robinhood. Both Vanguard and Robinhood state their Mission is to democratize investing, and both do in their own way. Vanguard is also commission-free for most of its own ETF’s, and for the individual investor, it is safer to invest in ETF’s than with individual stocks. Robinhood’s advantage (from the Millennial standpoint) is that one can invest in Cryptocurrency (Bitcoin and the like), which can’t yet be done on Vanguard. Vanguard and other competitors (Schwab, TD Ameritrade, and the like) also have invested heavily in apps, but they all charge commissions, although it is likely that they offer more features than does Robinhood. Robinhood has its own brokerage firm, Robinhood Financial LLC, which is registered with FINRA, and its accounts are insured up to $500,000 through SIPC, as with most other FINRA-registered firms. At this time, Robinhood only offers regular, “taxable” accounts – no IRA’s and the like, which is unlike the other major discount brokers. You can set up your Robinhood account to easily transfer money from your standard bank checking account, and Robinhood is currently working to add more cash management services.


If all you want is a basic entry into the stock market in a no-frills way using an app on your phone (because you are always on the go and can’t always be at your home computer when you want to trade), and you have a VPN on your phone so that you are protected when you use the WiFi at Starbucks or other public WiFi, then Robinhood may be right for you. My advice is to be careful if you decide to go with the Gold option and start to pay $5/month plus possible additional margin interest expense. If you want the app feature and don’t mind paying some commissions when you trade, then look at the other major discount brokers. All that said, kudos to Robinhood.com for developing this site and for their success thus far! BTW – I am not associated with Robinhood and am not being paid to write any of this.