The Risk Inversion.

Or Why Your Castle is being attacked by a teenager with a drone.

The Risk Inversion.

As investors, we can see these three technologies making dramatic gains.

As investors, we love businesses with strong moats, as this reassures us that their excess returns are defensible and will be sustained over a long period. The problem we face now is that, to take an obvious analogy, our multibillion-dollar castle with its powerful moat is being assailed by a teenager flying a $200 drone, and the castle has no defence against this cheap, readily available technology. The most obvious real-life example is Ukraine, a country with no navy, crippling Russia’s extensive, expensive and powerful black sea navy with drones and missiles, which cost almost nothing by comparison.

We can see AI in the newsflow; it's overwhelming. We can see AI in our day-to-day lives through LLMs. I use three daily. They are very effective for idea experiments, checking facts and arguments. This piece will likely be submitted to all three AI’s before being published. They will force me to buttress weak ideas with evidence.

https://www.gsb.stanford.edu/insights/ai-will-be-common-healthcare-stethoscope

In the short run, clinicians are going to use it to help patients better manage chronic diseases, which now impact nearly 60% of all Americans. If these diseases are well managed, you can decrease complications by 30% to 40%. We have excellent and inexpensive wearable devices that monitor blood pressure, pulse, blood glucose, and more. But patients don’t know how to interpret the data, and doctors don’t have time to review it. They say, “Let me change your medication, and I’ll see you in four months.” In the future, generative AI can guide patients with personalized recommendations for diet and exercise based on their needs and preferences and make sure doctors aren’t missing anything. Imagine if we had 30% to 40% fewer heart attacks, strokes, cancers, kidney failures. We’d have a much healthier country, we would all have more fulfilling lives, and the cost of medicine would plummet.

Above, Dr Robert Pearl, ex CEO of Permanente Medical Group, explores the impact AI is beginning to have on medicine.

This week I had to take a kitten to the vet. Using AI, I was able to rapidly describe the symptoms accurately, my tentative conclusions, and bring the vet up to speed. The Vet,give him credit, rolled with it, confirmed the diagnosis, and gave me the drugs I needed to cure my kitten. This was fast, for the vet, more consultations, for me, an accurate diagnosis and medicine, and for the kitten, less time in a stressful environment.

Regular readers will know my history in energy markets. They will understand when I suggest that Solar is the ‘One Ring to Rule Them All’, it's cheap, abundant and, coupled with batteries, the one powerhouse technology to emerge from the now two-decade obsession with renewable technologies by governments.

Key statistics

1. In 1958, the US Navy funded Vanguard 1, the first solar-powered spacecraft; this is an early example of government funding that helped drive technological advancements and reduce costs.

2. The cost of solar panels has fallen by 99% since the 1970s, from about $100 per watt (£77.09) to just under $0.20 per watt (£0.15) today.

3. Government incentives and policies have contributed to 60% of the overall decline in solar panel costs worldwide, with half of that coming from government-backed funding.

4. In the last ten years, solar panel costs have decreased by 90%.

5. Solar energy is now cheaper than fossil fuels globally, with solar energy plants costing £18.49 per megawatt-hour, compared to £27.74 per megawatt-hour for coal plants.

https://www.greenmatch.co.uk/blog/decrease-in-solar-costs

(Note in passing, some of the claims on this Green Blog are exaggerated, but directionally accurate)

Then add the shale, and for the first time since the 1970s, we can make an argument that energy has moved decisively from ‘shortage’ to ‘abundance’. Today, ironically, we’re testing that abundance with AI, which seems to have an insatiable appetite for energy.

In summary, we have three inexpensive, generic technologies that are in an aggressive growth phase, all of which significantly impact the existing moats around businesses that we, as investors, have long revered due to the strength of those moats. That strength must now be questioned. In short, this increases the risk that long-duration cash flows will suffer attrition from entrepreneurial start-ups seeking to capitalise on the pricing umbrella the incumbent has created.

It has to be acknowledged that we have seen this story before. The internet created the dot.com boom and bust. It also eviscerated traditional legacy media, a business Warren Buffett once loved for its entrenched, powerful moats.

Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.

https://www.businessinsider.com/warren-buffett-buying-newspapers-2013-3

By 2019, Buffett had acknowledged the impact of disruptive low-cost internet access on a once potent moat:

Napoleon once famously remarked, ' L'Angleterre est une nation de boutiquiers'. Anyone living in the UK today will have seen the impact Amazon and its many e-commerce brethren have had on the high street. An entire section of the high street has simply disappeared. Woolworths, Debenhams, and Karen Millen are bankrupt or in new hands.

This was one disruptive technology: e-commerce. What do three disruptive technologies do to your favourite moated castles?