Tuesday, November 27, 2012

The Efficiency Index

I've always loved the idea of indexes - a collection of securities that make it on and off a list based on a well-defined set of rules. As I tried to image what a hypothetical "Drashkov Index" would look like, I quickly realized that all the companies I would put on there had one thing in common - if successful they would make the world a far more efficient place.

I believe that for the foreseeable future (the next two decades at least), the world will not see any form of cheap energy. Consequently, we won't experience anything resembling the cheap-oil fueled growth of the post WWII era. Today Americans make up about 5% of the world's population, yet consume about 25% of its resources. With billions of people striving for a Western standard of living, demand for energy will be insatiable. At the same time, the increasingly obvious effects of climate change will make more people receptive to treating and pricing carbon as the pollutant it is.

If we accept a world of high energy prices, the only way to grow and develop is to make our world a far more efficient place and in a way that is much different from merely optimizing our existing products and processes. To illustrate the difference, consider a few examples:

  • Marc Andreessen famously said that "Software is Eating the World". By its very nature, doing tasks in software is far more efficient than doing them in hardware. Writing an article on a laptop and publishing it online is far more efficient than using a typewriter, the post office and getting it printed on a pile of dead trees.
  • The mechanical parts and motors in electric cars are efficient in a way ICE engines and drive trains can never be. Tesla's Model S - a large, heavy luxury sedan - is considerably more fuel efficient than any econobox on the market today.
  • 3D printing / Additive Manufacturing is inherently a much more efficient way of building objects than the wasteful processes of today's manufacturing, which mostly involves starting with large blocks of matter and getting rid of lots of material.
  • Lab grown and artificial meat requires far less biomass and energy to make a pound of meat protein. While many people choose a vegetarian or vegan lifestyle, the majority of people in the world would like to enjoy the same meat and protein-heavy diet as westerners enjoy today. The only plausible way this will happen is through something as radically new and efficient as lab grown and artificial meat.

I hope that one day we'll see a cheap green-energy fueled economic boom, but for the forceable future, I think we'll be living in a world of expensive energy. The Efficiency Index - a collection of companies whose raison d'ĂȘtre is to make the world more efficient seems like a great investment. So, what companies would you put on the Efficiency Index?