Here’s a topic for your next dinner party: Jeff Bezos, Bill Gates, Steve Jobs, Mark Zuckerberg, Elon Musk or Jack Ma — who is the biggest genius?
As tech share prices have surged, the sector is awash with the so-called cult of genius. With their hoodies, trainers and black polo necks, big tech founders are often likened to prophets with equally zealous followers.
Success in the tech sector relies on bringing people along with your vision. Contrast this to, say, mining. You don’t need to convince or inspire people that your way of getting a mineral out of the ground will change the world, you merely have to execute well.
Technology may offer solutions to some of the world’s biggest problems, but it’s not always clear how or where a tech business is going — often it involves a vision about the future, hence the need to inspire faith among one’s followers.
But what happens when a genius loses the plot? Or, in the case of Elon Musk, finds the pot. The Tesla founder was filmed smoking marijuana on a video podcast last week — the latest in a long line of poor judgment calls. Furore over the stunt, combined with the departure of two top Tesla executives, has seen the electric carmaker’s shares rapidly power down.
With the tech giants driving the current bull market, such volatility will be worrying for investors. Short sellers are closing in on the tech sector — and it's not just Tesla in the crosshairs.
Bets against tech have risen 40 per cent this year according to Nasdaq data, as investors hedge against the rise of the Faangs — Facebook, Apple, Amazon, Netflix and Google (owned by Alphabet). Excluding the so-called famous five, the S&P 500’s first-half returns would have been negative, hence fears of dotcom crash version 2.0.
Management quality is a key part of any credible investment strategy, so how does an investor navigate a situation where the prophet becomes part of the problem?
James Thomson of the Rathbone Global Opportunities Fund, which has substantial exposure to tech companies, puts it rather eloquently: “Larger-than-life chief executives are a mixed blessing. They inspire and supercharge the PR for the product, the employees and the stock. But if overconfidence and hubris is added to the cocktail, they can become a liability.”
You need to be a visionary to start a disruptive business, shake up the status quo and inspire colleagues and financiers to back you. But as big tech business mature, investors want to see a grown-up in the driving seat.
A great leader also needs the humility to accept their own shortcomings. Take Jeff Bezos. The Amazon chief executive is another “Marmite” character — you either love him, or hate him — but he is acutely aware of his own personal shortcomings, calling these “debilitating blind spots”.
As he puts it: “I had high standards on investing, on customer care, and on hiring. But I didn’t have high standards on operational process: how to keep fixed problems fixed, how to eliminate defects at the root, how to inspect processes.”
For similar reasons, many Tesla investors have called upon Mr Musk to appoint a chief operational officer. According to an interview in the New York Times, he unsuccessfully attempted to poach Facebook’s COO Sheryl Sandberg two years ago.
Mr Bezos, by contrast, rarely grants interviews or speaks in public — let alone engage in mud-slinging on Twitter. The only exception is his annual letter to shareholders, a strategy reminiscent of Warren Buffett. While not a tech founder, the Sage of Omaha certainly ticks the box of a cult business brain. It might be generational differences, but Mr Buffett prefers old-fashioned face-to-face meetings, contemplative conversations and the reflective nature of his annual missives.
Arguably, the best leaders are those who can relinquish control. This week, Jack Ma, the charismatic co-founder of Alibaba, announced he will step down next September from the Chinese internet behemoth he helped build. While Mr Ma’s rags-to-riches story has earned him a cult-like following, his strengths in succession planning mean the company is well positioned to carry on without him, with a deep bench of seasoned managers.
The importance of diversity in the boardroom should not be underestimated. It is a dangerous thing for cult leaders to be surrounded by “yes men” who fail to test their thinking. When share prices are soaring, nobody wants to listen to dissenting voices. But it’s different when they start falling.
Sceptics argue that the elastic between the valuation of the Faangs and out-of-favour stocks is reaching breaking point. Managers such as Sebastian Lyon of the Trojan funds worry that with earnings growth narrowly concentrated in a few expensively priced stocks, overpaying for growth that fails to materialise could prove a costly mistake.
Yet tech evangelists stress the powerful structural drivers behind recent performance, noting this wasn’t present in the dotcom bubble. Moreover, they argue that technology today is less capital intensive and less volatile, with higher profitability, higher free cash flow and even offering a small dividend. Valuations appear expensive, but they might not be that expensive in a world where decent growth is in short supply. Nevertheless, “this time, it’s different” remains one of the most dangerous phrases in investment.
One of the biggest challenges for tech founders and their boards is the feared regulatory “tech lash” against their increasingly monopolistic power. At an individual stock level, however, corporate hubris could present more of an immediate threat to valuations going up in smoke.
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