When you invest in companies that appear to be trading below their actual value economists call it value investing. Companies considered value stocks tend to have predictable business models that promise moderate yet steady gains over time. It’s how Warren Buffet made his billions, but it also explains why his portfolio has been performing poorly since the early 2000s. Why? You may ask. It’s because the glory days of this defending champion amongst investment strategies are coming to an end. The new champion being growth investing.

The automobile industry is a good example of this. Ford — a classic value investment — has been squeezing the last bit of profit out of its Mustang and F-150 models since 1964 and 1975, respectively.

In the opposite corner, we have Tesla who has pioneered an entirely new breed of vehicle: the electric car. As a growth company, Tesla prioritized increasing revenue at the cost of early profitability and was therefore considered a poor investment choice by the likes of Warren Buffet. In fact, Tesla was the most shorted stock in early 2020.

Both Ford and Tesla had a similar market value from 2014 to 2019. However today, Tesla has surpassed Ford with over 10x the worth, and is the highest valued stock in the entire automobile industry.

Ford beats Tesla in total sales today and is close to Tesla in EPS, earnings per share, a measure of company earnings. With massive innovation, Tesla’s growth has and is projected to continue to crush Ford.

The value investing model undervalues current trends, the future of the industry, and — in the case of Tesla — discounted the possibility that the revolution of cars in an era of horses could happen again with computers overtaking the automobile.

Over the past decade, growth companies have significantly outperformed value companies.

Source: CNBC

In fact, many of the highest value companies today are growth companies — think Amazon, Google, and Facebook. Growth investing has surpassed value investing, but why? The short answer: appropriability. In the 20th century, if you had a great idea, it would take a long time and a lot of money to implement it. The appropriability deficit was high. In other words, there was a big difference between the value you created and your ability to profit off of it. Today, the appropriability deficit is decreasing at a rapid rate. Technology makes it easier to disrupt old ideas. We can see this effect with how long companies stay valued as a top 500 USA public company.

source: Credit Suisse

Facebook’s original investor Jim Breyer, stated that due to the emergence of web services like AWS, marketing grassroots, and social media amongst many other tools, the cost of getting your product to market is declining rapidly. From 2009 to 2014 alone he claims the cost went down 80%.

Back to the example of Tesla. One of the reasons behind the company’s rapid success was a creative use of the internet — such as selling their cars over the internet versus car dealerships, and free marketing on Twitter.

Dollar Shave Club also demonstrated this trend by unabashedly challenging Proctor & Gambles’ long-time ownership of the high-margin razor market. Not only is the technology to launch and scale a business widely available and user friendly but access to information about the market, about how to run a successful business, expertise in any sector, is also available to anyone who has an internet connection. What used to be locked behind the gates of elite institutions and in physical publications on shelves or in the minds of people who are far away, is now accessible with the internet. This means that the unique value of the business can truly be the focus of the operators and obstacles that used to prevent a couple of passionate, inventive, entrepreneurial individuals from unknown origins from taking on a market behemoth, are increasingly irrelevant.

While value investing was wildly successful in the 20th century, more recently, the amount of money made today is less indicative of the amount you will make tomorrow. This trend will only accelerate due to the appropriability deficit decreasing. The future of business will be centered around who can create the most value for the world. That is one of the reasons why Elon Musk’s visionary companies have thrived. As it is easier than ever before to get the appropriate amount of value from an idea, the era of visionary companies has arrived.