| WEEKLY ROUNDUP The Two Questions to Ask to Find the Next World-Dominating Companies VIEW IN BROWSER Hello, Reader. If you were to compare human beings to companies, there aren’t many similarities to hang your hat on. For starters, we are, obviously, alive, and companies are not. However, companies are living, breathing organisms – they just so happen to subsist on a steady diet of market share gains and/or expanding profit margins. And also much like us fragile humans, companies enjoy a lifetime of indeterminate length. But their lifespans do eventually come to an end. Most investors ignore or overlook this important reality. They tend to think of their core investments as “forever stocks.” But that sort of perspective can be a dangerous one – especially now that artificial intelligence is running amok in the global economy. AI is spawning thousands of such companies, many of which will conquer and replace established companies that may seem indomitable today, if not immortal. That’s the process an Austro-Hungarian economist by the name of Joseph Schumpeter called “creative destruction”… and it is an inescapable facet of economic lifecycles. As investors, therefore, we cannot afford to bemoan new technologies like AI; we must embrace them. Companies will come and go, whether we like it or not. Take Blockbuster Inc., for example. It was the king of the hill in the movie rental business. But then along came rental channels that provided a measure of efficiency, like when Netflix began offering DVDs by mail. So, our mission is to cozy up to the up-and-comers, and steer clear of the down-and-outers. Unfortunately, because the process of creative destruction resembles a chaotic war zone, we cannot always identify the winners or the losers immediately. But this essential two-part test can help cut through the fog of war to provide clarity and insight, long before the hostilities end. The test relies on one word: efficiency. Since the process of creative destruction is a war of efficiency, the creator-victors of this war provide efficiency gains, or utilize them. The “destroyee”-victims do not. It is the secret sauce that converts upstart companies into world dominators. Recent geopolitical events – like the U.S.’s strikes against Iran’s nuclear sites over the weekend and Iran’s missile attack on a U.S. base in Qatar today – also work to highlight the importance of efficiency, as companies that can quickly adapt or secure their supply chains using advanced technologies like AI will become victors. So, when analyzing new investment opportunities, or evaluating existing positions in your portfolio, ask yourself these two questions… - Is this company introducing a significant efficiency boost, relative to the established, market-leading product or service?
- Is this company applying new technologies to boost the efficiency of its operations?
If the answer to either question is “Yes,” congratulations – you’ve probably got a creative winner on your hands. If the answer to both questions is “Yes,” you’ve definitely got one. The inverse is also true, of course. Companies that elicit a “No” answer to both questions are heading for the “destroyee” side of the creative-destruction spectrum. Efficiency gains do not always show up immediately in financial statements, but they do show up eventually in various ways: Expanding profit margins, a growing market share, rising revenues, or all of them at once. One of America’s earliest success stories illustrates the power of efficiency. But first, let’s take a quick look back at what we covered here at Smart Money last week. | 
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