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Investing success is underpinned by owning great businesses that can grow their earnings and deliver steady returns to investors for many years. And the companies that have the best prospects are the ones operating in industries driven by the biggest trends. In other words, your returns should prove far better when you invest in companies riding those trends than if you bottom-fish on beaten-down stocks in struggling industries hoping for a recovery. 

On the Dec. 1 edition of “The Wrap” on Motley Fool Live, host Jason Hall and Motley Fool contributors Brian Feroldi and Brian Withers discussed some of the biggest investing trends happening right now and set to drive big returns for companies involved over the next decade, and even beyond. 

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Transcript: 

Jason Hall: I describe myself as a trend follower. My investing, I try to find the biggest, most durable trends, and then find companies that are going to ride those trends. That’s really how I invest. What I wanted to hear from both of you guys is, what’s the most important macro trend that will drive investor returns over the next decade? Brian Feroldi.

Brian Feroldi: I don’t know. I have no clue.

Jason Hall: I bet you got more than one then.

Brian Feroldi: I can tell you that there are a lot of trends. There’s so much innovation and I actually made a handy graphic to track it.

Brian Withers: (Laughs) You did. I’m so surprised.

Brian Feroldi: Here is what I got so far. Here are a list of the major innovations that are happening in humanity right now. When it comes to innovation, when it comes to mega-trends, the thing that we as investors need to care about, is all innovations that are adopted, create value. Who captures that value is the key question for investors to ask. Sometimes it’s society, sometimes it’s management teams, sometimes it’s customers. Sometimes, it’s suppliers, sometimes its investors, sometimes it’s all or some combination of those.

The thing that we as investors have to ask ourselves is which of these trends, and this is a growing list as I connect with people on Twitter, which of these trends are durable, long-term, and are going to be consistently lead to bigger markets over time?

Two, do the leaders in that industry have competitive advantages that will keep them the leader?

Three, are margin sustainable?

Four, will profits eventually accrue to investors?

That’s a lot of things that you have to go through, which is one of the many reasons why I’m a big fan of just placing a lot of small bets on low probability, high impact things, and then just letting my portfolio concentrate itself.

Jason Hall: You know who is really good at lots of small bets? Peter Lynch. When he ran the Magellan Fund, that fund regularly owned a thousand stocks or more. He made a lot of bets. That fund generated 21% average annualized return for 18 years. For 18 years, yeah. Just crushed it. Of course, the average investor in the fund underperformed with the S&P 500 because they were too busy trying to time their way in and out of the Magellan Fund. 

Brian, there’s a huge takeaway from that, but I want to point out that table that you got. Number one, We were just talking about it because I do the same thing. I own all the stocks, lots of small bets, I think can be a great way if, especially if your timeline is long enough. That really makes a big difference. But Brian, I think it’s also important to figure out things sometimes you just say no to, that’s important. You can’t say yes to everything. Sometimes you have to say no.

Brian Feroldi: Or you can just say no for now.

Jason Hall: There you go.

Brian Feroldi: That’s another thing. There’s nothing wrong with saying, I don’t understand this, or more importantly, I don’t understand who is going to be a winner here. I think one of the things that was on there was organic foods. I’m very confident that 10 years from now, people will be eating more organic foods than they do today.

What companies — are the benefits of that going to be captured by investors? That I don’t know.

Jason Hall: That’s the key. It’s one of those things, like you’d look at industries that have historically been terrible investments, usually stay terrible investments. You have to be careful about walking into the trap of the next great idea that still in a terrible industry. That’s important. Hey, we’ve talked a lot about your stuff.

I know our good man, Brian Withers, also has something he thinks is a giant megatrends.

Brian Withers: I do. I’m actually going to pick one, unlike Brian. For me, software is eating the world still. If you’re familiar with Marc Andreessen, who founded Netscape, which was one of the first non-window or non-Microsoft Internet browser way back. He’s been in the tech industry for forever and now runs a venture capital firm.

Jason Hall: He’s done pretty well too.

Brian Withers: Yeah. Back in 2011, he penned this, prescient is the word, forward-thinking article on why software’s eating the world and I stuck the link in the chat here.

It really hit on a couple of trends, like high-speed internet, data storage costs are declining, the availability of mobile technology and then there was one others. The cost of these things and the prolific, and the ability for the internet to just carry data anywhere. A great example, “Pokemon Go” gets released and has like 23 million downloads over the first weekend and it’s like this smash hit and everybody’s playing it.

That’s the massive scale that software has, to where if that was a physical product that had to get manufactured, flown over the ocean to here, distributed out to the distribution centers, orders placed on the system, the Amazon trucks to drive out your house, would take forever. But people took 30 seconds to download Pokemon Go and people are walking around with their phones like this all weekend.

That’s just sort of to me that the power that software has especially in business. A lot of my investments are in software that business uses; Atlassian, DocuSign, and those kinds of things. Businesses are trying to do more with less, always. Nobody ever says I love the Amazon or Jeff Bezos quote, he says “nobody ever tries to say, well, I want to pay more in the future, I want it slower, I wanted to take more time to get delivered to me.”

That’s the common thing across businesses, they’re all trying to deliver more with less and how do they do it. Software takes a lot of that burden away, makes us all a lot more efficient.

Jason Hall: Somebody, I can’t remember who it was that said it, and I have quoted a few times on Live here, but every great company is tech company. The bottom line is whatever you’re doing, I don’t care if you’re making cars or mining iron ore, if you’re not leading with innovation and trying to find tools, largely software to drive automation, reduce costs, improve efficiencies, your biggest competitor is. And your biggest competitor is going to take your business away. I love this.

It’s really important because even if you’re looking outside of the tech industry, even if you’re looking outside of software as a service or Cloud or whatever, the next iteration of the hot growth and tech disruption is, find the companies that are innovating, whatever their industry is, those are the ones that are going to win.

For me, the big one that has driven so much of my investing thoughts over the past four or five years is just the growth of the global middle class. Here in the US, we’ve heard for decades the truth of the middle class has gotten smaller, loses a little bit every year it seems.

But around the world, the middle class is booming. The next decade it’s going to grow by about a billion people. Essentially that means that, that’s when people get to the point where they have disposable income. You’re not getting by. You’re actually, you have money. You can go buy stuff to make your life a little more comfortable. Spend some money on entertainment, that sort of thing.

It’s a massive thing that’s driving renewable energy, it’s driving infrastructure investment and a lot of the world, it’s driving electronic payments. It’s driving e-commerce. All of these things are being driven around the world by the growth of the global middle class. To me, that’s the big one that I closely and look for companies that are positioning themselves to kind of ride that, huge wave, I love it. I’m just a big fan of that.