The AI Disruption: Lessons from the Yellow Pages and the Future of Investment
The recent turbulence in software and “quality growth” stocks is stirring up familiar anxieties. Declines in companies like IBM, Salesforce, and Rightmove reflect a growing fear: that artificial intelligence won’t simply augment these businesses, but actively displace them. This echoes a past investment misstep, a cautionary tale with lessons remarkably relevant today.
The Yellow Pages and the Rise of Google
For decades, the Yellow Pages was a dominant force. Delivered to homes, it connected businesses with customers. The business model was simple – charge for prominence. But the internet changed everything. While many early internet companies faltered, the market anticipated the shift, and the Yellow Pages’ stock, Yell plc, began to suffer. The arrival of Google proved fatal. The shares declined, and despite attempts to bolster them, Yell ultimately went bankrupt.
Three Investment Lessons for an Age of AI
This experience yielded three crucial lessons for navigating today’s rapidly evolving market.
1. Embrace Critical Self-Assessment
When investments falter, the first instinct shouldn’t be to justify the position, but to question the original thesis. Adding to a losing investment is only sensible if the initial assumptions have been thoroughly re-evaluated and confirmed.
2. Value Tomorrow’s Earnings, Not Yesterday’s
Technological disruption often undermines existing revenue streams. Relying on historical earnings to value a company in the face of such change is perilous. Future profits may collapse, so calculations must account for this risk with a prudent margin of safety.
3. The Power of Diversification
Exciting sectors are inherently uncertain. A diversified portfolio, with numerous smaller holdings, can mitigate the risk associated with concentrated bets on any single, potentially disruptive technology.
Navigating the Current Tech Landscape
These lessons are particularly pertinent now. The barriers to entry in the software industry appear to be diminishing, with startups emerging to challenge established players. The accelerating pace of AI development adds to the uncertainty. Selling Salesforce was a strategic move based on this assessment.
However, AI won’t render all software obsolete. Deeply embedded businesses and those possessing exclusive data access are likely to endure. They may demand to invest in AI to remain competitive, but customers may resist paying a premium for these enhancements, impacting profitability.
Beyond “Quality Growth”: A Buffett-Inspired Approach
Many investors admire Warren Buffett’s investment philosophy, which centers on identifying “quality” companies with durable competitive advantages. However, a closer look reveals a greater emphasis on “value for money.” His largest holdings – branded goods, railways, energy, and Japanese holding companies – aren’t always considered “quality” in the conventional sense.
This diversified approach, spanning sectors less directly threatened by AI, appears effective. Oil companies and railways, for example, are less susceptible to immediate disruption.
Embrace Uncertainty and Seek Value
Rapid technological change breeds excitement, but as well uncertainty. Diversifying into more traditional businesses can provide stability and potentially attractive value. The current market offers opportunities to find companies that may be overlooked but possess enduring strengths.
FAQ
What is the biggest takeaway from the Yellow Pages example?
The biggest takeaway is the importance of recognizing and adapting to disruptive technologies before they completely erode a business’s value.
How can investors protect themselves from AI-driven disruption?
Diversification, critical self-assessment of investments, and valuing companies based on future earnings potential are key strategies.
Is AI a threat to all software companies?
No, companies with deeply embedded products, exclusive data access, or strong customer relationships are likely to be more resilient.
What role does Warren Buffett’s investment approach play in this context?
Buffett’s focus on “value for money” and diversification offers a framework for identifying companies that may be overlooked but possess enduring strengths.
