Microprocessors are much smaller than the 1971 model, above. Photo by Keystone/Getty Images.
Editor’s Note: Fisher Investments’ MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight.
(What follows is a post inspired by the fourth chapter of Ken Fisher’s new book, Beat the Crowd,” available at a bookstore near you. Or Amazon, as it were.)
Gordon Moore didn’t invent the semiconductor. He just wrote its future—in a 1965 article for Electronics magazine, “Cramming More Components Onto Integrated Circuits.” Underneath that mundane headline was a preposterous-sounding teaser: “With unit cost falling as the number of components per circuit rises, by 1975 economics may dictate squeezing as many as 65,000 components on a single silicon chip.” At the time, Fairchild Semiconductor—Moore’s employer—was at 64. Getting to 65,000 in 10 years would require cost-efficient capacity to double annually. But hey, it had doubled annually in recent years, and the conditions enabling that weren’t going anywhere, so why not do some back-of-the-envelope hypothetical extrapolating? The theory caught on. Moore’s Law was born, and on its 50th birthday, it still carries plenty of lessons for investors.
If you’re keeping score, Intel (which Moore founded after leaving Fairchild in 1968) wasn’t cramming 65,000 transistors on a single silicon wafer by 1975. They were only at 32,000, and Moore later revised his projection to “double every two years.” As Moore told IEEE Spectrum last month: “At the time I wrote the article, I thought I was just showing a local trend. The integrated circuit was changing the economy of the whole [electronics] industry, and this was not yet generally recognized. So I wrote the article to try to get the point across—this is the way the industry is going to get things really cheap.” The point was made, and right. Even if his 65,000 projection was a year early, integrated circuits indeed became exponentially smaller, cheaper and more powerful—and kept doing so. Today’s chips have over a billion transistors on them. You’re using the fruits of Moore’s Law as you read this article—our computers and smartphones are its direct descendants. Yet its power spread far beyond pure technology—cheaper, faster computers allowed technology to diffuse through all industries, transforming our economy and lives in ways unfathomable decades ago.
Lesson 1: Technology Isn’t Just About Tech
Fairchild Semiconductors and Texas Instruments—where integrated circuits were born roughly simultaneously in 1959[i]—were pureplay Technology companies. So were the hardware and software developers whose inventions eventually collided into the personal computer. Some did well, some fizzled, some still thrive today, yet most real winners from computers’ exponential advancements aren’t actually tech firms. The real winners are often the firms that figure out how to use that technology to their advantage. Service firms in the 1980s and 1990s computerizing their records to cut costs and boost efficiency. Retailers managing inventory with computers, not physical order books. Medical device makers deploying nanotechnology and powerful imaging hardware. Oil producers using geological imaging technology to find shale deposits a mile below the earth’s surface. Allan Alcorn and Nolan Bushnell in 1972 rigging up a TV, circuitry and coin collecting mechanism into a strange machine called Pong and giving birth to the entire videogame industry. (And Steve Jobs and Steve Wozniak refining that technology into a snazzy game called Breakout in 1976, sowing the seeds for Apple—now a consumer giant and the world’s largest firm by market cap.) Moore’s Law enabled scientists to sequence the human genome. It gave us microsurgery. Online trading. The shale boom. Robotics. It has touched and transformed every industry alive today.
Lesson 2: Want to Own Innovation? Own Stocks!
Not just tech stocks. All the industries above are chock-full of publicly traded firms using technology to their advantage. Some sell pure technology. Others package the tech into snazzy gadgets we can’t live without. Many buy hardware and software to boost production and efficiency. All derive earnings from technology. When you own a stock, you own a share in those earnings. Exponential technology has helped fuel astounding growth in stocks since the mid-20th century—it’s a big reason why stocks have historically outperformed all similarly liquid assets. The revolution isn’t slowing—forget all that poppycock about “secular stagnation.” It isn’t any more of a thing today than it was(n’t) when Alvin Hansen coined the term in the 1930s. The potential for technology—and investors who believe in it—is limitless.
Lesson 3: Tech Pioneers Aren’t Always the Biggest Winners
To the enterprising tech investor in the early 1960s, Fairchild Semiconductors probably looked like a sure thing. They were growing and profitable, with an amazing roster of talent. Even though four of the founders[ii] left after a wave of infighting in 1961, Moore and Robert Noyce—the official creator of Fairchild’s integrated circuit—were still there, leading R&D. But by 1967, Texas Instruments was in pole position, Fairchild’s earnings turned to losses, and a brain drain was in full force. Moore and Noyce left in 1968 to found Intel[iii]. Fairchild clung on, but its moment had passed. Texas Instruments and National Semiconductor emerged victorious, leading the circuit-making pack, and Intel of course achieved astronomical success under Moore and Noyce. Fairchild, never recapturing the glory days, was eventually bought by Schlumberger.[iv]
Fairchild isn’t alone here. Atari created videogames but died before the original Nintendo came out. Palm commercialized the PDA but couldn’t replicate that success with smartphones. Prodigy and Compuserve were the leading ISPs in the early 1990s; neither won big in the dot-com boom. Netscape Navigator was the leading web browser for about two minutes in the mid-90s, but then Internet Explorer happened.
If you’re investing in tech, getting caught up in early frontrunners’ hype can be dangerous. Sometimes, the pioneers win. Often, they burn out, and upstart competitors take the baton. Investigating how a company is run and what the competitive landscape looks like is paramount—there are no true sure things.
Lesson 4: Technology Snowballs
Fairchild might have fizzled, but its legacy illustrates technology’s exponential growth near-perfectly. Consider, for example, the collective achievements of its founders, known as the Traitorous Eight for their defection from Shockley Semiconductor Laboratories.[v] Moore and Noyce started Intel. Eugene Kleiner started a venture capital firm with Tom Perkins. To date, Kleiner, Perkins, Caulfield and Byers has funded—drumroll—Amazon, Google, Genentech, Electronic Arts, Twitter, Uber and so, so, so many more. Jay Last, Jean Hoerni and Sheldon Roberts founded Amelco Semiconductor, later bought by (and transforming) Teledyne. Victor Grinich went on to teach at Berkeley and Stanford[vi], shepherding the next generation of electrical engineers and thinkers. Tech today is full of "Fairchildren."
Lesson 5: The Future Is Still Limitless
Moore’s Law itself isn’t limitless. Some suspect it’s already slowing as development becomes costlier. Moore suspects it will run out within 10 years—the atomic scale and light’s finite speed create physical limits to how much you can fit on a square inch of silicon. But don’t fret. Says Moore: “We’ll be able to make several billion transistors on an integrated circuit at that time. And the room this allows for creativity is phenomenal. Now there are other technologies that are proposed to extend beyond what we can do with silicon. Some of the things coming out of nanotechnology may have a role to play, and materials like graphene, a single layer of carbon hexagons, are very interesting.” Some firms have already started shifting from shrinking transistors to stacking circuits, aiming for exponential processing power by building up instead of horizontally. Don’t underestimate human creativity.
Plus, Moore’s Law doesn’t operate in a vacuum. Koomey’s Law, articulated by researcher Jonathan Koomey, holds that the amount of battery power it takes to perform a given set of computer computations halves every 18 months or so. Hence how smartphones become smaller and more powerful. Koomey’s Law + Moore’s Law = why your smartphone does unfathomably more than your first PC did. Kryder’s Law, formulated by former Seagate exec Mark Kryder, holds that hard disk storage capacity doubles every 18 months—hence how your smartphone today has more storage than your PC did 15 years ago. Rounding out the core four, the Shannon-Hartley Theorem holds unimaginable potential for information transmission.
Lesson 6: The Future Is Unimaginable, but It’ll Be Great
We won’t speculate on what future inventions will emerge as these and other technologies collide—anything we throw out there will sound nuts, just as integrated circuits themselves were considered nuts in the late 1950s and Moore’s Law looked fanciful in 1965. But whatever shape tech takes, it will continue morphing and spinning off entire new industries. The financial rewards for innovation are even more vast today than when the Traitorous Eight took their leap of faith in 1957—profits are a powerful incentive to create and take risk. Components are still evolving, and with each evolution comes more potential for A to collide with B in new ways. Thanks to mankind’s accumulated knowledge and innate creativity, humans won’t stop dreaming up the Next Big Thing.[vii]
Remember this when you read about secular stagnation, dwindling resources and any other dreary long-term trend headlines love to hype. Consider all the problems mankind has solved through technology, how far we’ve advanced since Moore wrote that famous article—and how almost no one then foresaw exactly how amazing life would be by today.[viii] Remember the magic of technology, capitalism and compound growth—and if you want to own that growth, own stocks!
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[i] Texas Instruments’ chip, designed by Jack Kilby, was based on germanium. Fairchild’s, designed by Robert Noyce, was the original silicon chip.
[ii] Fairchild’s founders don’t get their due in this article, mostly because their story is too long and marvelous to contain in this space. Gordon Moore, Robert Noyce, Eugene Kleiner, Sheldon Roberts, Victor Grinich, Julius Blank, Jean Hoerni and Jay Last were engineers at Shockley Semiconductor Laboratories, which they believed was squandering its talent on the wrong ventures (and was also run by a very odd duck). In a then-unprecedented move, they resigned en masse, taking their research and leaving their cushy, predictable gig to start their own firm—and earning the nickname, The Traitorous Eight. With funding from Fairchild Camera and Instrument, they set up shop in Ginrich’s garage, and Fairchild Semiconductors—and Silicon Valley’s startup culture—was born.
[iv] Here, it would be poetic to say “all that’s left of Fairchild is a plaque on a midcentury office building in Palo Alto,” but Fairchild is still around. Schlumberger spun them off in 1997, and they’re a publicly traded firm based in San Jose. They bear little relation to the Traitorous Eight’s original endeavor, but they are a thing.
[v] Read Note 2 if you have not already.
[vi] Not at the same time, because rivalry.
[vii] In the “good old days” of Silicon Valley, a lot of this colliding happened after work, at Walker’s Wagon Wheel Tavern in Mountain View—located blocks away from Intel, Fairchild, Raytheon and GTE. Employees from all these theoretical rivals—including, legend has it, Moore—would meet up for a pint and a bite after work, exchanging ideas, sharing problems, collaborating on solutions, poaching talent, and probably letting slip a trade secret or two after a few rounds. The Wagon Wheel closed in 2000, but its spirit lives on in the valley’s many watering holes and coffee houses.
[viii] Exhibit A: The helm console of the original starship Enterprise, with its switches and big blinking buttons—no one envisioned the touchscreen.