Today I want to talk about one of the most important macro themes we’re currently tracking. And then discuss some of the amazing asymmetric trade opportunities which dovetail off this secular story. But, first, this.

Mauboussin wrote the following about S-curves in his book More Than You Know (emphasis mine).

There is substantial evidence that industry sales and earnings trace an S-curve after a discontinuity or technological change. Growth starts slowly, then increases at an increasing pace, and finally flattens out. This diagram is useful for thinking about shifting expectations. Investors (indeed humans in general) often think linearly. So at point A, investors do not fully anticipate the growth and economic returns from an industry, and they extrapolate the growth and economic returns from an industry, and they extrapolate relatively low growth. Expectations for future financial performance are too low. Following a period of sustained growth (point B), investors naively extrapolate the recent growth into the indefinite future.  Expectations are too high. Finally, at point C, investors reign in expectations and adjust stock prices to reflect a more realistic outlook.

Humans are bad at many things. Thinking in non-linear terms is one of them.

Things like exponential growth and the incredible power of long-term compounding are tough for us to wrap our little monkey brains around.

This is one of the many reasons why we’re naturally bad investors.

The ability to think in exponential terms and understand how to harness the power of compounding are a few of the traits that make the greats, well… great.

Lucky for us, we can all learn to think in these terms and utilize these frameworks with enough practice.

Adding the S-curve model to one’s tool-kit, certainly helps.

The power of the S-curve isn’t limited to only industries and products. It’s also relevant to countries and whole economies, as well.

If you study the history of how economies grow along their maturation cycle. How they move from frontier to emerging, and finally to developed economy status. You find that the growth is not linear but follows an S-curve pattern similar to the chart above.