Throw on your khakis, grab your binoculars and don’t forget your hat: It’s safari time!

Yes, we’re going on an elephant hunt. Not a real one—we’re trading stocks, not ivory! This is an observation-only expedition. Elephants are our friends.

As we saw in Chapters 3 and 4, markets are pretty efficient at pre-pricing all known information and widely discussed opinions. When everyone stares at something, and they chatter endlessly about their opinions and expectations, it can’t surprise. But if folks stare at one thing, they overlook something else. That something else may be the proverbial elephant in the living room—some huge truth that, for whatever reason, everyone ignores or forgets. Spot the elephant, and you can get an edge.

The elephant in the room is jam-packed with surprise-power mojo. It’s the big thing that has always been there, and everyone knows about, but they’ve forgotten (humans don’t have elephants’ awesome memories). If you ask someone about the elephant, they might nod politely—they might know of it!—but they’ll assume it’s too old, too familiar to be any good. They’ve discounted it and forgotten how much it works, just like we saw with professional forecasts in Chapter 2. Or they brush you off because they’re too busy looking for Dracula around the corner. Or they think the elephant is too boring. The latest headlines are way more exciting!

So what is the elephant?

Simple: Walter Matthau and Jack Lemmon in 1993.

Stay with me here. If you turned back time and asked your best buddies what they thought about Jack and Walter in early 1993, they’d probably say, “Those old guys? Lemmon was good in Some Like It Hot, and Walter was a riot in The Odd Couple, but I haven’t seen ’em in ages. They still at it?” If you then told your pals that Jack and Walter would headline one of the year’s biggest comedy hits—with Ann-Margret their leading lady—they’d have called the men in white coats to take you away. Those old geezers? Leads in a blockbuster romantic comedy? Get real! Could never happen!

But it did! Grumpy Old Men was the surprise hit of the year. It out-earned action studs of the day Sylvester Stallone and Arnold Schwarzenegger, hauling in over 70 million at the box office (big back then!). It was so big they made a sequel—another smash! No one saw it coming. But the producers who bet on it doubled their money.

To beat the crowd, you want to be on a perpetual hunt for Jack and Walter. Things everyone knows in the back of his or her mind but ignores. Things nearly everyone forgets, overlooks or assumes lack power. Things staring everyone in the face, but mostly unseen. Things hiding in plain sight.

Think of this chapter as your elephant-spotting living room safari guide. We’ll cover:

• Where the elephant in the room gets its mojo
• Some elephants with blockbuster power
• Where elephants hide in plain sight

How the Elephant Got Its Tusks

The average elephant lives about 60 years and has a steel-trap memory. Humans live longer but remember far less.

Our financial memories are particularly terrible. We remember really big things! The great and terrible times from our own lives and the things our parents and grandparents always talked about. Folks know the Great Depression. Nixon oil shock. Dot-com bubble. The 2008 global meltdown. But most other economic events, recessions and even old panics are gone. History students might learn about the biggies, like the Panics of 1873 and 1907, but most of it fades over summer vacation.

Few folks see the importance of knowing economic history. Have you ever looked at one of those “What happened in (insert year here)” things online? They’re all pop culture. Celebrities, scandals, politicians—the fun stuff. They ignore the stock market.

Try it and see for yourself. Google “1990 year in review” or “What happened in 1990?” You’ll get pop culture overload! Sports champions, Miss America, top-10 movies and TV shows and a snippet of the “I’ve fallen and I can’t get up” commercial. You’ll learn Chuck Berry was accused of being a peeping tom and supermodel Elle Macpherson was one of the year’s “hotties.” Some sites give you basic economic stats like average home prices, inflation, gas prices and the cost of an IBM PC—all to show you the cost of living. Some give you full-year gross domestic product (GDP) and government debt. One, “The People’s History,” mentions the US had a “major recession.” None mention the bear market. None even give full-year stock returns.

Old market volatility is going away. Old corrections. Old bear markets and their causes. Old tricks of the trade. All gone.

Let’s do another one: 1981! If you were alive then, you know President Reagan was shot. You know the shooter was John Hinckley Jr., and he had a crush on Jodie Foster, the actress. You may also remember MTV was born, Natalie Wood died, and Prince Charles and Lady Di got hitched. Even if you don’t remember “Bette Davis Eyes” was the number-one single, you can probably hum a few bars. But do you remember the capital gains tax hike? Do you remember markets did fine? And do you recall which parts of the market did best? Of course not. Our brains don’t work that way.

Things everyone lived through, feared or loved at one time, then forgot—those are the elephants in the room. Forgotten knowledge! Reliable truisms that aren’t priced! They should be, in theory, because they were once widely known. But they aren’t, because they’re forgotten and unseen. Humans’ terrible economic memories empower elephants.

Dumbo, Gross Margins and Other High-Flying Elephants

Here’s an elephant with blockbuster power: gross operating profit margins (GPMs). A business’s revenues minus cost of goods sold, as a percentage of revenues. A quick, easy way to see how profitable a firm is at its core.

Few folks today bother with gross margins. Post-tax earnings win the popularity contest. Those are the headline earnings numbers firms report every quarter. They report the absolute total in dollars and dollars per share. Big number good! Growing number good! Small number blah. Negative number bad.

Earnings are a fine statistic. They’re what you buy when you buy a stock! But earnings aren’t the most telling about a company’s profitability and ability to invest in the future. Earnings are skewed by accounting and other jiggery-pokery. Depreciation, write-offs, stock buybacks, one-off legal and regulatory factors—they all tell you little about the health of a firm’s core business. Earnings also don’t tell you how big a buffer a profitable firm has—how much room to invest more, absorb higher costs or weather a temporary demand drop.

Gross margins tell you this. In the old days, they were all the rage. When I was young, you didn’t have every possible piece of data about a company at your fingertips. All you had were company reports. Sales and cost of goods sold were right there. Everyone could calculate the gross margin. Just subtract and divide. No accounting skills required! Today, investors have information overload. The more data you have, the more you get bogged down in minutiae—more overthinking. Folks forget the simplicity and beauty of the old ways.

So the old ways have power again! Gross margins have big power. If a firm has thin margins, it’ll probably do best early on in a bull market. Thin-margin firms get punished in bear markets, when investors fear they don’t have enough of a cushion to survive. They’re usually over-punished, so they’re over-rewarded when stocks bounce and thin-margin firms bounce bigger. Later on, in the back half of a bull market, investors get choosier and want firms with more stable earnings growth and more ability to fund growth past any potential upcoming recession.

This is when stocks with fat gross margins shine (Table 5.1). The bigger a firm’s margins, the more resources it has to ensure its future. Invest in more research to find the next cutting edge. Market more. Afford more capital expenditures to boost production—expand, upgrade, you name it. All of these make future earnings more reliable, which markets love as a bull market wears on and fear of heights takes hold and new buyers, previously too fearful for stocks, start dipping their toes in the bull market’s warming waters. (Note, we didn’t quite get to high-GPM supremacy in the 2002-2007 bull market, since FAS 157 walloped it before high-margin firms really shined.)

Gross margins are your secret weapon when talking heads fret over earnings. Most blather on about whether a firm “beats” or “misses” (exceeds or lags consensus earnings estimates), as if what happened last quarter is the be-all, end-all. None look to gross margins for a hint of what the future holds. In Financials stocks, few examine net interest margins—banks’ equivalent of gross margins—to see how profitable the core is. They look everywhere else! Fines and legal fees! Trading and investment banking revenue versus retail banking revenue! Loan charge-offs! Asset write-downs! But not the one, simple thing that really sings. They miss the elephant.

When Good News Dresses Up as Bad News

Some elephants get their power because the media decides good things are bad. Few elephants are as bullish as these twisted false fears.

In 2014, stock buybacks became this species of elephant. Buybacks are great. We’ve known this for ages. It was near-canonical truth! When firms buy up their own stock, they reduce supply. Our high school economics courses taught us falling supply props prices. Buybacks are also smart financial management for the companies, which borrow cheap, buy shares in their ever more profitable firm, and pocket the spread. This is all a boon for investors!

But these days, buybacks are given a bad rap. Some think they’re a funny accounting trick to hide weak earnings and sad revenues. Others believe they’re a drain, siphoning money from investment, hiring and wages—they boost rent-seeking CEOs and no one else. This is putting social issues ahead of stock market issues. Shrinking supply, other things equal, is great.

Maybe, when you read this, buybacks will be “in” again and some other good thing will be forced to cross-dress as bad. How can you tell if it is truly bad or an elephant? Put on your scientist’s hat—or Einstein wig, if that suits you—and test the evidence!

To see how, let’s dissect the buyback blowback. First, we can poke at the earnings fake-out theory. Buybacks do boost earnings and revenues per share—they drop the denominator. But they do nothing to the numerators! Total sales and total net income (earnings) don’t change when share count falls. They are what they are—functions of costs, competitiveness and global demand. Buyback accounting trickery never enters into it. And where they do change the numbers—the per-share measures—this is good. Boosting earnings per share increases each shareholder’s slice of future profits, a basic reason folks buy stocks in the first place!

Next, you’d dissect the hard evidence. The anti-buyback brigade cited a Harvard Business Review study of how big US firms spent their money from 2003 through 2012. The study’s findings: The 449 firms in the S&P 500 that whole time spent 54% of net income on buybacks and 37% on dividends.¹ Using simple subtraction, several pundits decided that meant firms spent only 9% of earnings on capital expenditures (capex) and wages—ipso, presto, buybacks evil!

Here, you’d ask, what about corporate borrowing? Many buybacks are funded with debt—simple arbitrage, as I mentioned above. Tech giant Apple floated nearly 30 billion in bonds in 2013 and 2014 to fund buybacks and dividends. The interest cost was more than paid for by the savings from the buyback. The return on boosting earnings was an immediate return on amortized costs over 100%. Beat that. Companies also use bonds to finance capex—investing in structures, equipment, product development and R&D. This, too, is smart financial management. It lets firms keep cash reserves flush for a rainy day without impeding growth—just use their strong balance sheets to back a bond. Corporate bond issuance is a big reason why corporate cash balances and business investment grew hand-in-hand during the expansion that began in 2009. Few in the media will point this out, but through Q4 2014, business investment rose 15 straight quarters and sits at all-time highs.² A fact! Don’t take my word for it—you can look it up online at the US Bureau of Economic Analysis. You’d also see that the R&D component has been clocking new highs since 2010. All true—it just doesn’t square with the media’s thesis.

Recent history is rife with this kind of elephant. US political gridlock is a big one—we’ll get there in Chapter 6. Another is so basically bullish you might not believe anyone hates it today: a steep yield curve.

The Yield Curve Curveball

The yield curve—a graph of one country’s interest rates at different maturities—has a long, proud tradition as a leading economic indicator. It shows up in academic literature as early as 1913, in Wesley C. Mitchell’s seminal work, Business Cycles—his effort to offer “an analytic description of the complicated process by which seasons of business prosperity, crisis, depression and revival come about in the modern world.”³ Using a trove of economic, business and financial market data spanning 1890 through 1911, Mitchell sought patterns and relationships to prove or disprove the theories of his day—and to develop his own about when and why economies boom and bust. This work was the foundation of his later contributions to the efforts of the National Bureau of Economic Research (NBER) to develop the Leading Economic Index (LEI), as we covered in Chapter 3, and it is a classic—academic yet readable and a treasure trove of knowledge. But we’ll get to that more in Chapter 8.

In the book, Mitchell spends considerable time on how short- and long-term rates fluctuated over those decades, squaring their gyrations with overall business conditions. In one table, titled “Rates of Interest Yielded by Investments in Bonds and by Short-Term Loans in Seasons of Business Prosperity, Crisis, and Depression, 1890–1911,” he breaks down the 21-year period into short segments with characterizations ranging from “Prosperity” to “Severe Depression” and shows the average interest rates at different maturities in each period. Of the 25 windows, two were labeled “approach of crisis.” Two more were labeled “minor crisis,” each occurring before a “depression.” In all four, short-term rates were between one and five percentage points higher than long-term rates. You can see this for yourself—Cornell University’s digitized version of the entire book is available online at the Internet Archive (https://archive.org). The magic chart is on page 162.⁴

So we’ve known for over a century bad things happen when short-term rates exceed long-term rates. Mitchell’s commentary didn’t quite connect the dots, but Reuben Kessel did in 1965, observing: “During expansions, yield differentials between Treasury bills and nine- to twelve-month governments widen. . . . Converse implications are implied for contractions.”⁵ By the time former San Francisco Federal Reserve Bank economist Larry Butler published “Recession?—A Market View” in December 1978, it was widely accepted that inverted yield curves (short-term rates higher than long-term rates) were a “classic recessionary” feature.⁶ The yield curve gained popularity throughout the 1980s, and by 1989, economists James Stock and Mark Watson were lobbying for its inclusion in the LEI.⁷

The yield curve is a magical place where academic theory and real-world experience intersect. That’s why it works! As I mentioned in Chapter 1, yield curves represent banks’ profit margins—short-term rates are banks’ funding costs, long-term rates are their revenues, and the spread is their gross operating profit margin (net interest margin in industry vernacular). When the yield curve is steeper—long rates are way higher than short rates—lending is more profitable. Banks lend more, the quantity of money rises, and growth magic happens. When the yield curve is flatter, lending is less profitable, and banks lend only to the safest bets—low payout, so low risk. That slows money creation and velocity (how fast money changes hands), usually slowing growth. When the curve inverts—short rates exceed long rates—lending isn’t profitable, credit seizes and growth eventually grinds to a halt.

So for decades, almost everyone accepted that steep yield curves are good, flat yield curves are blah and inverted curves are dangerous. Yet in late spring and summer 2013, when long-term rates rose and the flat yield curve steepened, folks freaked out! They forgot about the yield curve! Instead they viewed higher rates as risky, fearing they’d dent demand for loans and tank the money supply. From May 22—the day Ben Bernanke first warned quantitative easing (QE) would end soon—through year end, 10-year Treasury yields rose and the yield curve steepened. Magical! Yet most folks dreaded the rise. Without even realizing it, they hated a huge fundamental driver of faster economic growth. That made the yield curve an elephant!

If you looked past the headlines and just believed in the yield curve in 2013—as I reminded folks in the Forbes snippet in the below box—you’d see the elephant. The magical truth that always just worked and everyone forgot. It was still there, still working. Ten-year yields rose a full percentage point between May 22 and year end, steepening the yield curve. The S&P 500 rose 13.1% over the same period.⁸

When Elephants Attack

We’ve chronicled some friendly elephants, but some elephants aren’t nice. Risks can be elephants, too! A charging elephant is even scarier than a charging bear.

The risky elephant mirrors the nice elephant. Nice elephants are good things everyone knew, then forgot. Mean elephants are risks everyone knew, then forgot. Think back to those long-term fears we covered in Chapter 4. As long as they’re widely discussed, like they are today, markets discount them. But if folks move on and forget their fears, they can become actual risks! Bad elephants! This is the market’s version of the boy who cried wolf. After a while, everyone discounted him. When he was finally right, no one paid attention. Same with markets.

For example, debt fears are everywhere today and have been for ages. Between the US Treasury’s online tracker and the marquee outside the IRS headquarters, anyone can see America’s debt, to the penny, whenever they want. It is out there, well-known and widely discussed. As we covered in Chapter 4, debt isn’t a risk today—not in the next 30 months! As long as everyone fears debt, as long as it remains a talk-radio staple, it should stay baked into prices. But if folks stop talking, it could become a risk! What if people forget to fear debt? What if interest rates skyrocket and stay there, debt service costs eat up too much tax revenue, we can’t afford it, and no one notices? An unseen debt crisis in the world’s largest economy, hiding in plain sight, would be a terrible shock for markets worldwide.

A Brief History of Tragedy

Forgotten history breeds mean elephants, too. Early in this chapter, we saw how old market volatility faded from memory. People didn’t just forget old panics, corrections and bear markets—they also forgot how stocks reacted to some deeply negative events!

Here’s one you might think I’m terrible to even consider—Presidential assassination. We don’t want to think about it, but to beat TGH, you must consider the unconsiderable.

We’ve had assassinations before. Everyone knows they’re possible. We remember the attempt on President Reagan. Many my age can easily recall November 22, 1963. But most folks don’t really think it will happen again. America is too civilized. The Secret Service is too good (despite a scandal over some severe 2014 lapses). Intelligence is too good. They’ve thwarted every attempt and rumored attempt for decades.

An assassination might be improbable, but improbable isn’t impossible. No matter how strong your political biases might be, you don’t want this to happen. Investors don’t. Nor do markets. The security breech alone could shatter confidence. The tragedy would also cause massive uncertainty. We know the Vice President, but only as the veep. Usually a lieutenant with a narrow portfolio of administrative responsibilities and maybe a funny gaffe or two, à la Dan Quayle and Joe Biden. We haven’t had to consider how America would change under his leadership—potential changes in economic policy and international relations aren’t baked in yet. Nor are folks’ feelings and opinions of the veep as a leader. When Presidents are elected, markets get to discover all these things slowly and price them in during the campaign, before the winning candidate ever takes office. In contemporary times, in 2014, no one is thinking of the veep as a potential President in the here and now. It isn’t priced in. An assassination would make markets price this in real-time. If they don’t like what they see, it could be deeply negative.

The market history here is limited, of course. Only four Presidents have been assassinated, and two assassinations—of Lincoln and Garfield—occurred before we have reliable stock market data. That leaves Kennedy and McKinley.

Markets were resilient when Kennedy was shot in 1963—assassination isn’t an automatic bear-market trigger, just a potential one of many. The S&P 500 did lose 2.7% the day of the shooting, November 22.¹¹ But it jumped 4.5% the next trading day, November 26, and the bull market continued.¹² However, Lyndon Baines Johnson was a well-known political commodity at that point, having held national office since 1937 and having come second to Kennedy in delegates in the 1960 primaries. As Senate Majority Leader, Johnson’s calling card was brokering deals to win support. Few expected policy to get wild.

When McKinley was killed in 1901, however, it was a different story. Before he was shot on September 6, the Dow was recovering from a 12% correction, which had bottomed August 6.¹³ This recovery reversed September 6, and stocks slid as McKinley’s health worsened.¹⁴ He succumbed on September 14, the Dow kept falling, and the correction turned into a bear market.¹⁵ Said otherwise, stocks likely moved fast down in light of a then not-well-known Vice President, Teddy Roosevelt, who carried a radically different agenda, style and peer group of counselors relative to McKinley. This piece of market history has largely faded, giving it elephant status. The Cowles Commission hasn’t verified data pre-1926, so most mainstream analysis of market history begins there. But while turn-of-the-century Dow data are limited and imperfect, they provide precedent and illustrate the risk.

When Textbooks Lie

Here’s another terrible event everyone knows but most believe can’t happen: World War III.

Everyone knows a massive global conflict would be unspeakably horrible—a horrendous loss of life, potentially with weapons of mass destruction leveling entire cities. We’ve all read the dystopian novels, seen the films. From 1984 and Brave New World to The Hunger Games, we see how terrible another world war and its aftermath could be.

But that’s all fiction! Fiction isn’t reality! As a society, we’ve largely convinced ourselves another world war is impossible. The world economy is too integrated, trade relationships too strong and diplomacy too good. We’ve evolved. We use sanctions, not bullets, to keep rogue world powers and wanna-be troublemakers in check. America and Europe have nuclear weapons as a deterrent, not for actual use. The Soviet Union died, ending the Cold War, and Russia keeps getting ever more backward.

A World War is a highly improbable event, but again, improbable isn’t impossible. Most folks thought the world too civilized and integrated in 1914, but World War I happened anyway. Dow data—again, limited but illustrative—show a 31.8% drop between Archduke Franz Ferdinand’s June 28, 1914, assassination and the end of the year.¹⁶ Stocks rose in 1915 and 1916, but the Dow peaked November 21, 1916—just after the Battle of the Somme, and the very day HMHS Britannic was sunk by a German mine. Stocks bottomed over a year later, on December 19, 1917, after losing more than 40% as fighting raged across the European theater. And, of course, it was “the war to end all wars.” Didn’t happen.

Again, these old Dow data are unreliable—always be skeptical! Market data during World War II have been painstakingly verified, and they paint a similar picture. When Germany annexed the Sudetenland in mid-1938, the S&P 500 appeared to be recovering from the bear market that began in 1937. But Hitler’s seizure of Czech territory truncated it—his limitless territorial ambitions became clear, forcing markets to price in the likelihood of a long, destructive global conflict. They bounced sideways for months, but when France fell, the bottom fell out.

Back then, everyone thought France was good at war. The French were the experts at trench warfare in the Crimea. The Franco-Prussian War was a hiccup, but they redeemed themselves by fighting the Germans basically to a draw. World War I, another trench success. The Maginot Line’s marketing tag was probably “Nothing beats a French trench.” (Sloganeers like rhyme.) But when Germany had paratroopers and could sneak tanks through Belgium, that trench did no good. Believe it or not, that was a surprise. German troops maneuvered around the Maginot Line and invaded France on May 10, 1940. Between May 9, 1940—the day before—and April 28, 1942, the S&P 500 fell –38.4%.¹⁷ France’s fall was the huge negative surprise no one saw coming.

Market history shows world wars kill bull markets. It is a fact! Yet it gets distorted by many high school history textbooks claiming World War II was bullish! Millions of Americans grow up believing the “guns and butter” economy was the only reason we emerged from the Great Depression. Folks see the bull market beginning in 1942, fully three years before Allied victory, and forget the market’s reaction to Hitler’s aggression early on. Terrible as we know war is on a human level, textbooks might lull America into complacency.

World War II didn’t cause America’s upswing. The timeline doesn’t even match! Gross domestic product (GDP) resumed growing in 1939, two years before World War II spending started in earnest. The private sector drove growth in 1939 and 1940. Table 5.2 shows annual real GDP growth during this stretch, along with each major category’s contribution to growth. In 1939 and 1940, the feds contributed far less than consumers and private investors.

Look closely at 1942 and 1943, and you’ll see something interesting. As government spending skyrocketed, private investment tanked and consumer spending wobbled. There are two schools of thought here. One says only the war effort kept America afloat—the “guns and butter” miracle. Another argues massive government spending crowded out the private sector, making life harder for businesses and people. Here, too, demand side versus supply side.

Economists, historians and ideologues have debated this for decades. How should you think about it? Up to you! But using our contrarian brain-training, I think the supply side raises curious points. The demand-side view doesn’t explore the counterfactual—what would have happened if there weren’t a war? What if production weren’t diverted from consumer goods to war machines? What if Americans never had to face rationing? How would businesses and people have allocated capital? Would America have grown even faster?

I didn’t make any of this up. The philosophy dates at least to French economist Frédéric Bastiat’s 1850 essay, That Which Is Seen and That Which Is Not Seen, which explored the unseen consequences of government spending. Part I, “The Broken Window,” is a parable about a shopkeeper whose son breaks a window. The shopkeeper is peeved—that window costs six francs to fix! “But on the bright side,” say the neighbors, “you’ll keep the glazier employed.”

The neighbors see the broken window as a positive—stimulus for glassmakers! Their reasoning is easy to buy, because we see the glazier fix the window and get paid. This is the “seen” effect of the broken window.

Looking only at the “seen” is too myopic! So Bastiat explored the “unseen.” The six francs spent on the window were six francs the shopkeeper couldn’t spend on shoes or books. What if the shoemaker or the bookseller would have put those six francs to better use than the glazier?

“The Broken Window” was a rebuttal to a French politician who claimed burning down the entire city of Paris would boost France’s economy because rebuilding would create demand and jobs, but it works most anywhere. You can apply it to World War II spending—and the widely held belief that postwar rebuilding was a massive stimulus for Western Europe. Big natural disasters, too. When you see these arguments, remember Bastiat’s conclusion: “Society loses the value of things which are uselessly destroyed . . . To break, to spoil, to waste, is not to encourage national labor; or, more briefly, destruction is not profit.”¹⁸ Often true whether physical property or personal opportunities are destroyed. On the other hand, sometimes we demolish buildings, bridges and more to build newer, bigger and better ones on prime real estate, creating greater wealth. It can go both ways.

“The Broken Window” is an elephant, too. It is age-old and widely read. Henry Hazlitt updated it in his classic, Economics in One Lesson (Harper & Brothers, 1946). The broken-window fallacy, as it is now known, is a classroom staple. But few think of it when disaster strikes or government programs are launched. Most focus on the seen—few fathom the unseen. Fathom the unseen, and you have contrarian power. We’ll see this more in Chapter 6.

It Can’t Be an Elephant If …

Even if something sounds sensible, if everyone is talking about it, it can’t be an elephant. Remember, we’re looking for the pre–Grumpy Old Men Jack Lemmon and Walter Matthau—not Brad Pitt and George Clooney. Unless you’re reading this in 2035, and Brad and George are has-been geezers. Then, maybe you do want Brad and George! But you don’t want the A-list celebrity.

If Wall Street loves something, no matter how strong the logic, it can’t be an elephant. Here’s an example: “disruptive technology.” This twenty-first-century buzzword refers to innovations that transform (or disrupt) entire industries, displacing old technologies. Think the Internet, PC, cell phone, smartphone, robotics, 3-D printing and hydraulic fracturing. When a new firm comes along with a sexy new technology, pundits pile on the bandwagon, telling investors to get in on the Next Big Thing before it’s too late. It is happening right now in 3-D printing—where specialized printers read a three-dimensional design (usually from a CAD program) and form the object by “printing” razor-thin cross-sections in resin or metal, layering them from the bottom up, and fusing them together. Pundits champion the firms manufacturing the printers, assuming the pure-play investment is best. You see similar enthusiasm toward robotics and drone makers.

These aren’t elephants! The technology may be great and game-changing, and its creators and makers might make big profits, but pure-play investments often aren’t where the real magic is. Too loved, too known. Too faddish. And surely too priced.

The elephant in technology often isn’t the tech firms. The real elephant is the creative user who spins the technology into something wild. The toymaker married to the circuit designer who dreams up next year’s must-have gizmo for kids. The barista in Cupertino who overhears two Seagate employees discussing their newest, smallest hard drive and dreams up talking coffeemakers that think perky thoughts. The worried mom who rigs a microdrone to keep an eye on her kids while they’re walking to school and commercializes it.

These are the real disruptors—the inventive folks using new technology to take on industries. Netflix didn’t invent DVDs or streaming. Reed Hastings just figured out how to use them to drive Blockbuster out of business. Uber and Lyft didn’t invent smartphones or apps. They spun off those existing technologies to turn taxi service on its head. Steve Jobs didn’t invent the mobile phone. He and the Apple engineers just collided cell phones with microprocessors, touchscreens, tempered glass, flash memory, a camera and powerful software. In 3-D printing, the inventive users are the industrial firms using the new technology to slash production costs. Or the medical device firms 3-D printing heart valves. Look past the headline technology, find the inventive users, and you’ll find some elephants.

Elephants can live anywhere. As we’ll see later on in Chapter 8, many live in old books. Others live in a thorny place we’re about to journey to: politics. We’re friends now, so it’s safe. Ready? Turn to Chapter 6!