Andrew Lockley – Exponential Investor (United Kingdom) –
AL: Can you start by giving us a bit of an intro to your career and personal history?
ET: The good news is that I’m doing exactly what I always wanted to. At a family reunion when I was seven, I met a cousin who is a broker at Merrill Lynch, in New York. He explained to me what he does, and how he helps clients achieve their long-term investment goals. I knew then that the world of finance and markets was where I would end up. I took a circuitous route: through a degree in Philosophy, and stint in sales, account management and teaching at Bloomberg. Then I had the good fortune to meet David Fuller – who helped crystallise my perspective of the markets, through more than a decade of close collaboration. I was doubly-lucky to meet my lovely wife, in 2004. She has expanded my horizons, tempered my arrogance and gifted me with a love I didn’t imagine was possible – not to mention two wonderful daughters.
AL: What would you say is the “big idea” behind Frontier Tech Investor?
ET: The pace of life is speeding up, because of the rapid pace of technological innovation. That’s creating massive opportunity; and it is going to change how we live our lives, in profound ways. Everything from transportation to housing, healthcare and work are being overhauled. There is massive potential for profits as a result of this accelerating evolution. However it is also contributing to more uncertainty, and to concerns about the sustainability of our jobs, political systems and personal relationships. Frontier Tech Investor is aimed at helping subscribers explore the investment opportunities as they arise – so that they will be in the best possible position to meet the inevitable challenges as they emerge.
AL: You give out stock tips. What would you say has been the most successful one to date?
ET: Capitalism trends towards concentration, so it is difficult for small companies to become big companies without being taken over. Just think about the number of companies Google/Alphabet and Facebook have acquired to ensure they remain on top of the social media advertising pyramids, while they also succeeded in fending off the advances of would-be suitors as they grew into the behemoths they are today.
That practice of acquisition of smaller companies by much larger ones, seeking entry into new markets was behind Intel’s decision to buy Mobileye. While on the one hand I spend the majority of my time looking for the next big technology investment story, I also keep the question of how likely the firm is to be taken over at the back of my mind. It is often what distinguishes my choice of one company over another and is why I chose Mobileye instead of Delphi Automotive for example.
AL: Likewise, are there any that have surprised you on the downside – and why was this?
ET: I hate being wrong but unfortunately no one is perfect. I really should listen to my wife more on that front. Investing and trading are inherently uncertain practices, but it is that element of risk that creates the opportunity for profit as well so I’m afraid the potential for being wrong just goes with the territory.
I was wrong in how I handled the position we had in Acorda Therapeutics. This was one of the biotech shares singled out for special mention by politicians, during the US Presidential election. They were seeking to gain favour with an electorate that was sick of overpaying for drugs. I sold the position at a loss because it was suffering from bad press, and the price was breaking down. This was despite the fact it still had some promising treatments in development. Following the election I did not repurchase the position and it subsequently rallied back above where the initial entry point had been. I was tempted at that point to re-enter the position – but my long experience of being punished for chasing influenced my decision to demur. That was good news because it collapsed from mid-March, mostly because 4 of the patents it holds for its leading multiple sclerosis drug (Ampyra) were invalidated.
At this stage the entire fate of the company is resting on the success of its CVT301 Parkinson’s treatment, which did pass Phase 3 trials. However they may not be granted their commercialisation licence for another year – which is why the share is trading down now. Sometimes it just comes down to bad timing – because if Acorda had lost its Ampyra patents next year it would probably not have been subject to such volatility.
AL: At the live event we spoke at in London, you talked about looking for stocks that range, and then break out. Can you tell me a bit more about this approach?
ET: Frontier Tech Investor is a medium-term to long-term investment service. I also write a medium-term trading service called Trigger Point Trader. It’s not specifically focused on technology, but on opportunities that fit a certain set of circumstances. One of the reasons I look at ranges, which can be thought of as lengthy congestion areas where trading is relatively boring compared to the trending phases, is that they eventually end in surprising ways. If you think about it, a market is only ever trending or ranging – so when they transition from one condition to the other, it’s a pivotal time to look for investment opportunities. In short “ranges are explosions waiting to happen”.
AL: Is there anything you’ve read in Exponential Investor, which you’ve got a particularly strong opinion on?
ET: I think that for many people outside of the millennial generation the notion of the sharing economy must seem totally alien. However, it represents a valid business model. It appeals to the up-and-coming generation, which has concerns about rampant consumerism, the use of precious resources, making sure everyone has equal opportunity to obtain goods and services – and also because they very often do not have the financial wherewithal to fund large purchases.
The evolution of this sector is as much a reflection of the shape of society, as it is about technological innovation. Personally, I see the sharing economy as a direct response to the diminished financial wherewithal of young consumers, and their reduced prospects for traditional gainful employment – coupled with the enabling factors provided by rapid technological innovation.
Viewed in that context we can group mostly privately-held “sharing economy” companies, with the increasingly-large number of major corporations embracing a subion model. The primary difference being one is offering to help improve efficient use of hardware, with a new model – while the other is smoothing out the cost of useful services, with an upgraded model. The key difference for investors is that it is difficult to invest in sharing companies, but easy to find subion models.
This is a very big issue, because an increasing number of large, well-established companies are pursuing a subion business model to great effect. Adobe Systems, Autodesk, Microsoft, Netflix, Amazon have all adopted a subscriber-based business model.
By joining their “club”, subscribers can always obtain the most up to date software or service, do not have to worry about how to fund large potential future outlays, and get greater control of day-to-day expenses. Companies receive steady cash flows, are under less pressure to discount, and don’t have to worry about how to sell the next version of their software or service. In many respects it’s win-win for both the companies and consumers.
This is an example of how the “new economy” came up with a new business model – ie sharing assets and resources. Large companies co-opted it for their own uses by employing a subion model.
ET: That’s correct – but the barrier to entry for a property sharing website like Airbnb is reliant on attracting landlords to the platform. Airbnb has prospered where others have failed – but it is at risk from a “hybrid timeshare” model where you could pay a subion for access. Lay away for global accommodation, in other words – so that landlords could get paid a constant income, which would smooth out mortgage payments. Property is a very specific use argument; while software is the preserve of corporations, and they have no incentive to share assets. Subions are the best option in that regard.
The broader question about ownership of an asset and specific use is a very big topic. It will be with us for the lengthy medium-term I suspect. In the short-term the ability of companies like Uber to evolve to a point where they are profitable will be a key litmus test for the asset-sharing business model, not least in terms of its scalability. Nevertheless, it will have a hard time competing with the asset rich subion model in most sectors.
AL: I know you can’t mention firms – but what sectors can readers expect to find you tipping, at present?
ET: In little more than a year of publication I have focused on three primary areas of focus: health care, energy and artificial intelligence. Within health care I’ve had a particular focus on biotechnology – and most particularly in synthetic biology and genetic editing. In the energy sector I focused on battery technology, and next generation solar panels. In artificial intelligence I focused on autonomous driving. I’ve also made recommendations on how to invest in online education, and in next-generation materials like graphene. I predicted the kind of cybersecurity event we’ve had to deal with over the last week more than six months ago – and I have made recommendations on how to investor in both cyber defence and offense.