America: The World’s Greatest Engine of Innovation

by Nicholas Vardy
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"America is the greatest engine of innovation that has ever existed, and it can't be duplicated anytime soon, because it is the product of a multitude of factors: extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, a risk-taking culture with no stigma attached to trying and failing, a noncorrupt bureaucracy, and financial markets and a venture capital system that are unrivaled at taking new ideas and turning them into global products."

- Thomas L. Friedman

America is the most innovative place on earth.

And American companies have an unrivaled impact on the rest of the world.

Billions of people use Google and Facebook each day.

Apple is the most valuable and profitable company on the planet.

Close to 120 million Netflix subscribers stream a bit of America into their lives each night.

In short, "the next big thing" almost always comes out of America.

New York Times columnist Thomas Friedman highlights five factors why this is so.

Here's my perspective on each of them...

Extreme Freedom of Thought and Independent Thinking

Whether it's defeating the British in the Revolutionary War...

Or settling the Wild West...

Or Steve Jobs making "a small dent in the universe" by inventing the iPhone...

The concept of the hero who challenges the system and succeeds by forging his own path is deeply ingrained in American culture.

That's mainly because most other countries focus on rote learning.

In contrast, the U.S. education system cultivates independent thinking and allows you to explore your particular strengths.

I hear this from the kids I interview when they apply to study in the U.S. each year.

They want to go to Stanford and Silicon Valley because they can study what they want, forge their own paths and even start their own companies.

One student I know started a successful app development company in London.

Today he runs his business - with six employees - out of his Stanford dorm room.

This experience contrasts sharply with studying at, say, Oxford or Cambridge.

In the British system, students commit to a specific course of study when they apply... and they can't change their minds.

That's not exactly a formula for innovation.

Steady Migration of New Minds

Immigration is a hot-button issue in both the U.S. and Europe.

The U.S. attracts undocumented immigrants from "south of the border."

Europe is overwhelmed by refugees from the war-torn Middle East and beyond.

But what's even worse for a country's long-term prospects?

No immigration at all.

Just consider the two greatest rivals of the United States over the past generation: Japan and China.

In the 1980s, Japan was set to take over the world.

U.S. business schools taught Japanese management techniques.

The Japanese stock market made up a larger portion of the global stock market than the U.S.'s.

Today China has taken over the mantle of potential global leadership.

What do they both have in common?

Neither Japan nor China welcomes immigrants.

Japan credits its homogeneous culture with its peace and harmony. China has the lowest share of immigrants in the world as a matter of national policy.

This lack of immigration is a demographic time bomb for both economies.

With more than 20% of the country over age 65 and the birthrate hitting record lows, by 2060 Japan's population will plummet by roughly a third compared with today's levels.

By making itself attractive to immigrants, the U.S. avoids this demographic time bomb while simultaneously attracting top global talent.

Risk-Taking Culture

"It is better to fail conventionally than succeed unconventionally."

This quote from John Maynard Keynes epitomizes the difference between the United Kingdom (and more broadly, Europe) and the U.S.

European business culture is risk-averse compared with the U.S.'s.

Yes, European tech hubs like London, Stockholm and Berlin have produced 41 tech "unicorns" - private companies that are worth at least $1 billion.

But many top companies that start in Europe migrate to the U.S.

A friend of mine was an early investor in Shazam, the music recognition app.

Although Shazam started in London, once it hit critical mass, the firm had to open an office in Silicon Valley.

And now Shazam is in the process of being acquired by Apple, which is right down the road.

Noncorrupt Democracy

Americans love to rail against burdensome government and bureaucracy.

And yes, states like New York and California are a miasma of regulation. So businesses are voting with their feet, moving to Texas and Florida.

However, that kind of regulation pales in comparison with what goes on in the rest of the world.

Try setting up - and running a business - in any of the BRIC countries (Brazil, Russia, India and China).

A classmate of mine from college managed 200 Indian programmers in Bangalore, India, for a publicly traded U.S. company.

As he told me after he returned to the U.S., "Imagine the worst corruption you possibly can. Now multiply it by 100. That's how bad it was."

Financial Markets and Venture Capital

By now, the lesson should be clear: Environment matters.

Now add to that environment the unique financial infrastructure that allows companies to grow and thrive here in the U.S.

It's no accident that the FAANG stocks - Facebook, Amazon, Apple, Netflix and Google - are all based near one another in Silicon Valley (Amazon being the only exception).

Ditto for privately held unicorns like Uber and Airbnb.

The lesson?

If you're talented and grow up in Estonia, you can invent a service like Skype. But to turn it into a global business, you need to end up on the U.S. West Coast.

Skype became a brand thanks to innovative capacities of a handful of Estonians. But it became a globally recognized verb only after eBay - and then Microsoft - acquired it.

The bottom line?

What Thomas Friedman wrote in 2004 still holds true today...

What would Indian techies give for just one day of America's rule of law: its dependable, regulated financial markets; its efficient, noncorrupt bureaucracy; and its best public schools and universities? They'd give a lot.

It's that combination of liberty and wealth that is the key to America's - and your individual - success.

Good investing,

Nicholas

We're Digging This Stock

While we may all be jockeying for position on a global scale, Japan (like the U.S.) needs the Chinese market to help grow its economic output.

Emerging Trends Strategist Matthew Carr added Japanese equipment manufacturer Komatsu (OTC: KMTUY) to the Oxford Resource Explorer portfolio exactly one year ago today. Here's his update from April on why it's still a "Buy"...

The Japanese construction equipment manufacturer Komatsu (OTC: KMTUY) is the world's second-largest heavy equipment maker behind Caterpillar.

We added it to the Oxford Resource Explorer Foundation Portfolio last May as a play on the commodities rebound. It's also a fantastic play on the Fourth Industrial Revolution with its development of autonomous haulage vehicles.

Komatsu has been good to us. It's our top open position, currently up almost 39%.

But shares of the company have been a little sluggish this spring, despite its peers recovering from the broader pullback.

And that's due to China...

So far in Komatsu's fiscal year 2017, sales of hydraulic excavators in China have increased more than 100% in eight out of 11 months.

And Komatsu's total retail base sales in China have grown more than 100% in seven out of 10 months.

It's by far the heavy equipment manufacturer's strongest growth market. Considering the overall size of China's economy, it's an extremely important one as well.

And China is what helped Komatsu's revenue increase more than 50% in the third quarter, as well as more than 47% through the first nine months of fiscal year 2017. This was better than the company forecast.

But in February, Komatsu's sales of 6-ton hydraulic excavators in China dipped 21%. And there's some unease over future growth.

From my perspective, it might get a little bumpy simply because the year-over-year comparisons are going to be tough.

Last February, sales of Komatsu's 6-ton hydraulic excavators in China increased a ridiculous 295%.

So those massive increases Komatsu saw in sales in China over the past year might provide a bit of a headwind. We won't see bad numbers. It's just hard to more than double your sales each month in a single market... no matter how large it may be.

Despite the intense focus, China currently accounts for only 6.9% of Komatsu's total sales.

We must keep in mind that North America is the most important market. It represents 24.2% of total revenue. And in terms of mining and construction equipment, the percentage is almost double that.

The company's home market of Japan represents 14.2% of revenue.

Meanwhile, other strategic growth markets, such as Latin America, account for 14% of total revenue. While Asia - not including China or Japan - currently represents 12.7% of total sales.

China is important - no doubt about it - and it will garner headlines. But North America, Latin America, Asia and Oceania are the markets we want to watch.

Plus, what really helps Komatsu is the strengthening of the U.S. dollar. I know, a stronger dollar is bad for commodities, which isn't the best situation for us as energy and resource investors. Yet a weaker yen boosts Komatsu's bottom line.

So even though Komatsu is our top open position, it's still a "Buy." There may be some noise from China. But when the company reports fourth quarter earnings, I think investors will be pleasantly surprised.

- Donna DiVenuto-Ball with Matthew Carr

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