ARKK And The Theory Of Disruptive Innovation

ARKK And The Theory Of Disruptive Innovation


Human progress is growing exponentially and it’s starting to accelerate meaningfully.

Now more than ever, investors may be unwise to base their expectation of the future on how things were on the past.

ARKK is a reasonable way to get exposure to the fast growing disruptive innovations of tomorrow.

DariaRen/iStock via Getty Images Thesis

The belief that value investing always outperforms growth over the long term is a fallacy based on a linear view of past events. While owning value is good risk management and value may outperform during short periods when growth gets too heated, over the long-term growth will outperform. The definition of long term continues to shorten as new inventions make it easier to create even newer inventions. ARK Innovation ETF (NYSEARCA: ARKK ) is one of the better performing options for getting exposure to exponential growth opportunities in the current market. A Timeline of Human Progress

Source: The Singularity Is Near

The above chart is a plot of major events in human history. These events were selected by Ray Kurzweil in his 2005 book The Singularity Is Near. Humans evolved somewhere in the middle of the chart and proceeded to make life-changing technology like the wheel, writing, and electricity. The book was published in 2005, so it lacks some recent inventions like smartphones and cloud computing.

This chart looks relatively predictable and linear until we start paying attention to the axis labels, which are exponential. That is, the time represented between the leftmost hash marks is 10 times longer than the time represented between the next two hashmarks.

If we plot it linearly instead, it looks like this: Source: The Singularity Is Near

In this graph, virtually all of the progress dating back to the evolution of primates occurs on the relative tail end. This is what exponential growth looks like. If we plotted it as a mathematical function, that line would continue getting more vertical indefinitely.

Of course, this is just the compilation of one author. There’s room for bias. However, if we take a compilation from 15 sources listing key events in human history, it looks very much the same (back to the exponential x axis here): Source: The Singularity Is Near

The reason why I’m showing these charts is to point out that only very recently have major inventions started occurring in a shorter time interval than the average human lifespan. In the distant past, a person could live their whole life without experiencing any major technological change. A hunter gatherer would have spent their entire life using the same tools to find the same food and medical treatments from the day they were born to the day they died, just as monkeys do today. The “growth investments” of that time simply wouldn’t have panned out.

As Yuval Noah Harri describes in his book Sapiens, this slow pace of progress (on a human timescale) led many ancient people to believe that the best days were already in the past. For example, the Christian religion speaks of the Garden of Eden, a paradise that the first humans were banished from.

It’s only fairly recently that people have begun to believe that the best days could be in the future, and this philosophical change corresponds with the acceleration of technological progress. This belief in the future being better than the past is what enables the stock market in the first place; otherwise, nobody would be willing to pay more for a company than it currently earns.

All this is to say that things really are different now. Each life-changing invention only makes it easier to create the next life-changing invention. People today can search for knowledge online, communicate instantly from anywhere in the world, and get rapidly updated information. What would have taken a lengthy search through potentially outdated library books in the past – or been completely inaccessible – can now be found in seconds. This type of progress saves today’s innovators immeasurable time and allows them to build much more quickly than people could in the past. Impact On The Stock Market

New technology requires fewer and fewer resources, meaning that it can scale much faster than what was possible in the past. While an industrialist in the 1800s might have had a great business idea, it would have taken him decades to acquire the manufacturing equipment, logistics network, and human capital necessary to build his product and scale it into one of the world’s largest businesses. Today, anybody can create products with just a computer and sell them almost […]

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