Newspapers

A now-classic example of this deadly lack of paranoia from Chapter 6 was the impact that the Internet has had on newspapers and publishers, which were initially dismissive of this new medium—something that would eventually disrupt and alter their business to the very core.

The pain point for newspaper publishers became an opportunity for the Internet industry and the companies it comprised (Yahoo!, AOL, and others at the time). Some overcame it while some like the New York Times and the Wall Street Journal continue to flirt with different business models. However, the availability of content elsewhere, mixed with the loss of advertising revenue, has put more than a few newspapers in serious financial distress, and many have outright failed. The stock price movement of Gannett, McClatchy, and Lee Enterprises over 10 years (Figure 7.1) shows just how challenging this industry has become.

We'll walk through several other pain points that are vexing consumers, businesses, government, and other entities. With each, we'll show you how hidden within lie a variety of opportunities for you, the investor. As we go through these, think about how to shift your thought process in your everyday life to see your frustrations as opportunities. That's the Cocktail Investing way. Our next pain point is in the headlines almost every week and potentially affects all of us.

Cybersecurity

Over the last few years, headlines have been near rampant with the growing number of cyberattacks that have hit both private-sector companies and governments. Cyberattacks, hacks, and identity theft are just one of the dark sides of the ever-increasing digital transformation society is going through: email; messaging through Apple's iMessage, Facebook's Messenger, or on Microsoft's Skype; sharing photos through email, messaging, or posting them on Instagram or SnapChat; using social media such as Facebook or Pinterest to keep up with friends and family; banking and conducting other transactions on your laptop, smartphone, or tablet; storing documents, photos, or other key need-to-have-within-a-moment's-notice files in the Cloud for easy usage anywhere, anytime; and downloading or streaming music, movies, and television shows to your connected digital device of choice.

There is even more to come, as the companies leverage the intersection of connectivity, sensors, and semiconductors as we discussed in the last chapter to bring new products and services to market. When we talked about AT&T (T), Verizon (VZ), and other mobile carriers spending billions on their networks in the last chapter, you can imagine that they won't be content with only connecting smartphones and tablets. Now they are tackling home security services and other connected home applications, the connected car, eHealth, and others, which naturally concerns anyone who travels extensively and ponders the complexities that come along with managing life when you're hundreds or thousands of miles away.

Whether you're reading this on a Kindle, tablet, smartphone, or an “old-fashioned” printed book, we're pretty sure you're taking part in, or at least recognizing, the digital transformation taking place around you. There was a time when you had to, gasp, get up from the couch to change the TV station to one of the only four options, but now you can watch a mindboggling number of programs and movies anywhere, anytime on your Apple TV, iPad, or laptop. Before broadband access was the norm, you would've heard a squawk and static-like noise as your dialup modem connected to your Internet service provider, like America Online. As a pair whose livelihoods rely on access to information and data, we both thank God for the proliferation of high-speed broadband, mobile, and wifi networks.

In 2012, as this digital shift reached critical mass, we started to hear about companies like American Express, Visa, Honda, MasterCard, Google, Yahoo!, LinkedIn, and Facebook being hacked. Those attacks and others prompted then–U.S. Defense Secretary Leon Panetta to warn in late 2012 that the United States would likely face a “cyber-Pearl Harbor” and that the country was increasingly vulnerable to foreign computer hackers.

Toward the end of 2013, Target was hacked over the Christmas holiday shopping season, later disclosing that more than 70 million credit cards and other customer data were “compromised.” That's a pretty sour way to close out the year, particularly if you were Gregg Steinhafel, the chairman and CEO of Target. But Target wasn't the only company to get hacked in 2013. Soon afterward, retailer Neiman Marcus admitted that it, too, had been cyberattacked, and the thieves made off with customers' payment card information. As we moved through 2014, the high-profile attacks continued at companies like Sony (SNE) and the Home Depot (HD), as well as those at Staples, Healthcare.gov, and more. According to Symantec's annual Internet Security Threat Report, the number of cyberattacks against large companies rose by 40 percent last year, with five out of six companies employing more than 2,500 people targeted in 2014.² Needless to say, those attacks have continued into 2015.

Cyberattacks and hacking aren't just hitting corporate America, and identity thieves don't only target individuals. Government institutions are also in the crosshairs. Unknown hackers broke into more than two-dozen servers at the U.S. Postal Service in 2014, including one containing names, Social Security numbers, birthdates, and other personally identifiable information on about 800,000 workers and 2.9 million customers.³ Other cyber-victims included the Washington State Administrative Office of the Courts and one of the internal websites of the Federal Reserve.

In a January 2014 Senate Judiciary Committee hearing, U.S. Attorney General Eric Holder said that the United States had not done enough to prepare for cyberattacks and that the Justice Department needed to “take very seriously” the creation of a multiyear plan to deal with the threat. Holder said he expected the threats to increase, although the United States hasn't devoted enough resources to the problem. Over a year after Leon Panetta raised his concerns, the government still hadn't done enough. Our ears perk right up when we see this; it is a big problem, and no easily implemented solution means opportunity.

Holder and others were correct, as evidenced by the November 2014 cyberattack on Sony Pictures Entertainment. This was one of the most high-profile hacks, and we eventually learned that the intrusion had been occurring for more than a year prior to its discovery.

The hackers involved claimed to have taken over 100 terabytes of data from Sony that included personal data, contract details, private email messages, and details of behind-the-scenes politics; they also leaked several upcoming films. In December 2014, former Sony Pictures Entertainment employees filed four lawsuits against the company for not protecting their data that was released in the hack, which included Social Security numbers and medical information. When it presented its first-quarter 2015 financial results, Sony Pictures set aside $15 million to deal with ongoing damages from the hack. Sony bolstered its cybersecurity infrastructure as a result, using redundant solutions to prevent similar hacks or data loss in the future, and Sony co-chairperson, Amy Pascal, announced her resignation effective May 2015.

In hindsight, it was pretty clear that Sony had not invested adequately in its cybersecurity, even though top management knew full well that nothing can turn a potential box office dynamo into a dud better than spoilers and leaks.

We'd like to say that was it for 2014, but there were dozens and dozens of other high-profile attacks and hundreds more that fell below the headline news cycle. Officials in President Barack Obama's administration confirmed that there had even been a cyberattack on White House computer networks in 2014.

We are avid readers of policy papers, studies, polls, and reports. On the topic of cybersecurity, we unearthed several key points in Cisco System's 2015 Annual Security Report. The report explores the ongoing race between attackers and defenders, and how users (that would be you and us) are becoming ever-weaker links in the security chain. Some of the key findings from the Cisco report follow.

Attackers have become more proficient at taking advantage of gaps in security to evade detection and conceal malicious activity. This means attackers are increasingly savvy concerning how, where, and when they are launching attacks. Through the first 11 months of 2014, spam volume increased 250 percent year-over-year, according to Cisco's data. Another strategy that is increasingly being used is malvertising (malicious advertising), which works through web browser add-ons to distribute malware and unwanted applications. Cisco notes that the use of malvertising also means that attackers are buying advertising to deliver malware—a very different strategy than what has been done before, which means more opportunities to offer protection.

The malvertising-focused strategy was part of a larger shift in the nature of attacks from the corporate entity, meaning networks, servers, and the like, to the user of a computer, tablet, or smartphone. Why attack the user? Because he or she is the entry point into a company or other institutional assets through tactics such as sending a fake request for a password reset that leaves one open to identity theft and other subsequent attacks. This is particularly true given the adoption of bring your own device (BYOD), the cloud, and desktop virtualization clients.

Just as attackers have upped their game, companies will need to respond, but in a more holistic and strategic way rather than simply addressing each attack as it happens. According to the “Cisco Security Capabilities Benchmark Study,” 91 percent of organizations have an executive with direct responsibility for security, but what's really needed is a shift in thinking about security at the business unit and board level that includes understanding cybersecurity's role in the business and as a differentiator when it comes to competitors, customers, and partners. Businesses need to look at managing security well as a potential competitive advantage, rather than just a cost of doing business.

Society has always had crime. The criminals learn to take advantage of new technologies alongside the rest of society; thus, their methods become more sophisticated, and that forces institutions and individuals to get smarter in order to fend them off. The same is true with cybersecurity.

Cybercrime is an exploding pain point for many, and it has not only given rise to privacy concerns but also boosted demand for cybersecurity. By 2016, the global business community is forecasted to spend $86 billion on information security, up from $62 billion in 2012, according to market research firm Gartner Group.⁴ Ta-da! Pain point meets opportunity.

As an investor, we love investing in companies that address pain points, and in this instance that means companies like Symantec Corp., the aforementioned Cisco Systems, FireEye, Palo Alto Networks, Fortinet, and a number of others. We'd also point out that cybersecurity companies are bulking up and acquiring other companies to round out their offering or fill a product gap for the challenges that lie ahead. In 2014, FireEye made a $1 billion offer to acquire Mandiant with the rationale that FireEye's cyberattack protection solutions would mesh well with Mandiant's ability to respond to cyber-espionage. Palo Alto Networks acquired Morta Security, a company founded by former National Security Agency officials.

As hackers become more resourceful and target newer digital lifestyle applications—the connected home, the connected car, eHealth, wearables, and those applications that will no doubt become popular in the next few years that no one has named yet—we expect cybersecurity spending and strategic M&A activity to continue.

As mentioned in Chapter 6, one of the best ways to better understand the dynamics of an industry is to talk with an expert in the field, so we headed out for some Cocktail-Investing-style chats with Andrew Braunberg, Research Vice President, and Mike Spanbauer, Vice President of Security Test & Advisory at NSS Labs, the world's leading information security research and advisory firm.

Andrew and Mike are some seriously in-the-know guys. This is why we prefer meeting with industry experts to understand where the pain points and opportunities lie and which firms are most likely to take the lead on addressing the pain. Yet despite all that is being done, it looks like the cybersecurity industry is, at least in 2015, still in its infancy both in terms of defining the source of the pain and the possible solutions. There are a few companies that have a clear lead in specific applications, but overall, there is a lot that still needs to shake out.

We'll discuss in Chapter 10 the different ways to invest in pain point solutions, depending on the nature and age of the industry or sector. For now, we'll just say that sometimes it pays to pick a specific company; other times, you may be better off investing in a broader manner within a sector or industry.

It isn't just new technologies that can cause pain; sometimes the simplest thing in the world, like water, can be in need of innovation.

Water

Did you know that those ears of fresh summer corn you slather with butter, salt, and maybe hot sauce take up to four gallons of water a week to mature? To produce an acre of corn, 350,000 gallons of water are needed over a 100-day growing season. And you thought your water bill was steep!

To produce a pound of wood, hardwood trees use about 120 gallons of water. An average-sized birch tree has about 200,000 leaves. More than 90 percent of the water that enters a plant passes directly through and evaporates into the atmosphere. If a human had a circulatory system like that, an adult would need to drink more than 20 gallons of water each day just to survive!

Given the astounding proliferation of bottled water, you'd think we had infinite supply, but while nearly 70 percent of the world is covered by water, only 2.5 percent of it is fresh, and just 1 percent of that is easily accessible.⁷

As the global population continues to grow, it means that over time, there will be greater competition for that 1 percent. We've seen the impact of short supply and rising global demand for beef, coffee, and other commodities, and it tends to lead to higher prices. As families in emerging economies have more and more disposable income and trade up in their purchase decisions, there will be greater demand for resources such as fossil fuels, oil and natural gas, mineral resources (such as copper), and others—including water and the more water-intensive products like beef.

Even without population growth, data from the United Nations points out that in the last century, water usage grew at more than twice the rate of population increase. By 2025, an estimated 1.8 billion people will live in areas plagued by water scarcity, with two-thirds of the world's population living in water-stressed regions as a result of usage, growth, and climate change.⁸

Now think of the implications on food, manufacturing, and what your own water bill could look like in the coming years.

Sadly, there is a second part to the growing water problem, and it has to do with the delivery mechanism for the water we consume. When something is out of sight, it tends to be out of mind, but if you've driven much across the United States in recent years you know firsthand the need for highway, bridge, and pothole repairs. When it comes to water, because most of it is out of sight, we aren't aware of the age and growing needs of our nation's water infrastructure. In a report to Congress released in 2009 and based on data collected from utilities in 2007, the Environmental Protection Agency (EPA) found that the nation's 53,000-community water systems and 21,400 not-for-profit non-community water systems need to invest an estimated $334.8 billion between 2007 and 2027.⁹

Like most problems that go unresolved, they tend to get bigger and bigger. According to the American Society of Civil Engineers (ASCE) most recent report card published in 2013, America's drinking water received a grade of D. Per the ASCE, there are 240,000 water main breaks every year, and trillions of gallons of water are lost each year due to “leaky pipes, broken water mains, and faulty meters.” Leaking pipes lose an estimated 7 billion gallons of clean drinking water a day and projections are that 45 percent of the country's pipes will be rated poor, very poor, or beyond repair by 2020.¹⁰

Cities throughout the nation, including Toledo and Philadelphia, are dealing with water main breaks and struggling to pay for the upkeep and improvements of their water infrastructure. In the past 30 years, Philadelphia has had between 439 and 1,316 water main breaks per year.¹¹ In January 2016 the governor of Michigan declared a state of emergency for the city of Flint, Michigan, because of widespread lead poisoning caused by aging pipes in the city's water system. Shortly thereafter President Obama declared the crisis to be a federal state emergency. As of the writing of this book somewhere between 6,000 and 12,000 residents had been diagnosed with severely high levels of lead in their blood and 10 people were suspected to have died as a result of the contamination. This crisis is bound to push other municipalities to take a closer look at the state of their own water supplies.

It is estimated that more than one million miles of water mains are in place in the United States. In 2012, the American Water Works Association (AWWA) calculated the aggregate replacement value for these pipes was approximately $2.1 trillion¹² if all were to be replaced at once. The good news is that like most home repairs, not all pipes need to be replaced immediately or all at once. Making some modest adjustments, the AWWA estimated that the most urgent investments could be spread over 25 years at a cost of approximately $1 trillion.

While that sounds better, fixing the water infrastructure problem in the United States will take time. According to the ASCE Report Card:

The need will double from roughly $13 billion a year today to almost $30 billion (in 2010 dollars) annually by the 2040s, and the cost will be met primarily through higher water bills and local fees.

Delaying the investment can result in degrading water service, increasing water service disruptions, and increasing expenditures for emergency repairs. Ultimately we will have to face the need to “catch up” with past deferred investments, and the more we delay the harder the job will be when the day of reckoning comes.¹³

By 2050, the AWWA indicates the aggregate investment needs would total more than $1.7 trillion. For perspective, in 2015 GDP for the entire United States was just shy of $18 trillion.

Figure 7.2 shows the ever-widening gap in water spending needs, which for Cocktail Investors is evidence of profound possibilities.

While this has been a quietly festering problem, thanks to the near-persistent drought conditions in California, now in its third year, water problems have come into the limelight. How bad are the drought conditions? In April 2015, California Governor Jerry Brown issued a statewide order to cut water consumption. Included in California's preliminary recommendation by the State Water Resources Control Board, 135 communities faced a 35 percent reduction in urban water usage, another 18 communities, including San Francisco, faced reductions of just 10 percent, while the remainder of the 400 California water agencies covered by the executive order had to make cuts of 20 to 25 percent.¹⁴

Taking the microscope off California and looking at data from the U.S. Drought Monitor shown in Figure 7.3, which looks at drought conditions for all 50 states, we find the situation is far more dire. As of mid-November 2015, more than 45 percent of the contiguous United States was in some state of drought.¹⁵

As you pay your monthly bills, you've probably noticed you've been paying more to your water utility. Water utility bills have been increasing pretty steadily, up almost 5 percent per year between 1996 and 2012 according to AWWA, but as the current drought situation worsened, the price of water rose 6 percent in 30 major U.S. cities during 2014.¹⁶

When we talked about reading the economy like a pro we told you that when we think we see a trend, we always look for confirming data points. That's applies not only for the economy, but also to trends like pain points.

Another confirming point that it's more than just California dealing with rising water costs, between 2010 and 2015 water prices in 30 major U.S. cities rose 41 percent on average,¹⁷ which is the equivalent of adding roughly $20 per month to what was a monthly $50 water bill in 2010!

This situation has the potential to be a long-term pain point, which in our view is always appealing when it comes to making investment decisions. Like most problems there are layers, and that holds true for this water-related pain point. The supply–demand imbalance bodes well for water utilities that are able to push through price increases that benefit revenues, margins, and earnings. Most publicly traded water utilities are also dividend-paying companies, which makes them an even sweeter investment at a time when suppressed interest rates are making decent income-generating investments more scarce.

We've looked at pain points arising from changing technology as well as limitations with natural resources, but pain points can also arise from changes in society.

Changing Demographics

Merriam Webster dictionary defines demographic as being of or relating to the study of changes that occur in large groups of people over a period of time. There is no shortage of collected data on the United States or even the global population broken down by any number of characteristics from age to income and many things in between.

Remember filling out those pesky Census forms? Well, it may take a while, but the U.S. government does indeed collect and eventually tabulate all that data and publishes much of it in one central repository known as Census.gov. Luckily for us, the U.S. Census Bureau now breaks down all that data into easily digestible topics, but so much data are available that the bureau also publishes summary findings, better known as QuickFacts.¹⁸

Notice we said “so much data” and not “so much information.” The difference between the two is that data consist of raw and unorganized facts that need to be processed. When these data are processed, organized, structured, or presented in a given context so as to make them useful, they become information.

Many businesses collect and study demographic data because changes in the population, its preferences, and needs can have a big impact on an industry or a company's business. Strolling through the mall Chris has often wondered why it is that there are so many more clothing and footwear choices for women than for men (and no, he is not channeling his last name while doing so). The simple answer is that women are the world's most powerful consumers, and according to global strategic services firm EY, their global income will reach $18 trillion by 2018!¹⁹ With women driving 70-80% of all consumer purchasing, it stands to reason that retailers would target them first and foremost.

So, yes, demographic information can be very helpful, and the good news is that you don't need to spend a lot to get it. Unlike giant consumer products companies, you're not betting the farm on a few new products, but, rather, looking to see which industries and companies are poised to benefit from the demographic shift while sidestepping those that will be facing headwinds. We'll look at two different demographic shifts: the aging of the population and the plumper population.

Plumper Population

There is another part of society that is growing, this one at the waistline. Obesity has been described as the fastest-growing public health challenge we've ever faced, and while there are a variety of causes, the most common ones cited include inadequate activity, unhealthy eating habits, and changing food alternatives. Figure 7.4 illustrates just how widespread the problem has become, and we have been closely tracking the costs associated with obesity for several years. All the data point to it being an epidemic that has both direct and indirect implications, on top of its staggering costs.

The data are rather eye opening:

• The World Health Organization (WHO) estimates that two-thirds of the adult population in the United States is overweight.³⁰
• According to the Centers for Disease Control and Prevention (CDC), during the past 20 years, there has been a dramatic increase in obesity in the United States. More than one-third of adults (34.9 percent) and approximately 17 percent (or 12.7 million) of children and adolescents aged 2 to 19 years are obese.³¹
• According to the American Medical Association, obesity rates in the country have doubled among adults in the past 20 years and tripled among children in a single generation. Nationwide, nearly 70 percent of Americans are overweight or obese,³² and half of all Americans are projected to become obese by 2030.³³

While those figures are not perfectly in sync, when taken together they present a pretty compelling argument, but the forward-looking view is even more disturbing.

Based on research by Emory University healthcare economist Ken Thorpe, Ph.D., executive director of the Partnership to Fight Chronic Disease (PFCD), a report commissioned by UnitedHealth Foundation, Partnership for Prevention, and American Public Health Association showed that if current trends continue, 43 percent of U.S. adults will be obese, and spending on obesity-related medical problems will quadruple to $344 billion by 2018.³⁴

According to the Journal of Health Economics, annual healthcare costs of obesity-related illnesses are a staggering $190.2 billion or nearly 21 percent of annual medical spending in the United States. Childhood obesity alone is responsible for $14 billion in direct medical costs.³⁵

In 2010, the Congressional Budget Office (CBO) found that nearly 20 percent of the increase in healthcare spending was caused by obesity. Even the CBO recognizes that fighting obesity and related chronic conditions in the long run can help save money by reducing healthcare costs and obesity-related costs, such as absenteeism, that weigh on businesses.

Obesity costs so much because it leads to greater rates of heart disease, stroke, diabetes, cancer, hypertension, osteoarthritis, gallbladder disease, and disability. Now here's the real shocker—if obesity rates were to remain at 2010 levels, the projected savings for medical expenditures would be $549.5 billion over the next two decades.³⁶

Don't let the U.S.-centric data make you think it is just a national problem; obesity is a global issue. The WHO estimated the global number of overweight adults increased 44 percent from 2005 to 2015 to 2.3 billion, while the number of obese adults was estimated to have increased 75 percent over the same period to 700 million.

In June 2013, the American Medical Association (AMA) voted to officially recognize obesity as a disease. That change meant doctors could change the way they treated the problem, and it could also mandate insurers to cover treatments. Clearly this was a signal from the AMA that we have to get a handle on obesity because of the long-term impacts it has not only our health but also on our healthcare costs.

Soon after the new AMA classification, “The Treat and Reduce Obesity Act” was introduced by Rep. Bill Cassidy (R., Louisiana) and Rep. Ron Kind (D., Wisconsin) in the U.S. House of Representatives and Sen. Tom Carper (D., Delaware) and Sen. Lisa Murkowski (R., Alaska) in the Senate. The bill, which was assigned to congressional committee in June 2015, aims to help lower healthcare costs and to prevent chronic diseases by addressing America's growing obesity crisis. It would allow Medicare patients access to weight-loss counseling and new prescription drugs for chronic weight management, among other provisions. In Chapter 5 we discussed how politics and regulation can impact investing. The AMA's decision started a process which is changing the economic dynamics of the weight management industry.

Think of this through your Cocktail Investing eyes:

• We know obesity is a growing problem with mounting costs associated with it.
• When obesity became recognized as a disease, that paved the way for treatment to be covered by Medicare. This means that tax dollars have been made available for treatment.
• That opened the door for new prescription drugs to treat obesity alongside or in addition to diet and eating better, exercise, and certain surgical procedures.

As awareness of a pain point rises, new solutions arise to address them, and that spells opportunity for new industries and companies, potentially at the expense of others.

So far in this chapter, we've talked about those kinds of pain points that cut across industries and affect a wide range of companies. We're not sure there isn't an industry that won't be impacted by cyberattacks. Maybe one that still uses a pencil and ledger to conduct their business, but as we saw in Chapter 6, those have probably gone the way of the dodo bird. Demographic shifts like the aging of the population ripple through a number of industries, bringing new opportunities and challenges along with them.

Not all pain points are as widely evident as cybersecurity, aging of the population, or the plumping population. Some are subtle, at least at the beginning. They start off small, but over time continue to grow until we wonder how we never saw them before. In some ways, it's like trying to imagine the world before the Internet, and we know how hard that can be at times. When we started talking about changing demographics, we shared how Colgate tracks demographic information to identify its target consumer—but what if those consumer preferences started to change?

Changing Consumer Preferences

If we watch evolving demographics over time, we can pick up on shifting patterns and preferences. Earlier we mentioned that some consumers are looking to eat “better.” Better can mean different things to different people, but in this case we are defining “better” as higher-quality food, or what some have called “food with integrity.” Many will quickly think of Whole Foods Market when they read that description, and while that would indeed be a good example, there is more going on than meets the eye.

You've probably noticed shifting square footage at the grocery store, with more and more of it being dedicated to natural, organic, non-GMO, gluten-free, and other healthy-lifestyle products. Even restaurant chains are focusing on gluten-free and low-calorie meals. Why? Because a growing number of consumers want those kinds of products.

According to the 2014 Market LOHAS (lifestyle of health and sustainability) MamboTrack annual consumer research study,³⁷ more than 80 percent of participants claim to seek out non-GMO products, and 70 percent of buyers searched for gluten-free products. Now “claiming to seek” out is a little nebulous, so here is some harder data from Nielsen's TDLinx and Progressive Grocer—the U.S. supermarket industry, which includes conventional supermarkets, supercenters, warehouse grocery stores, military commissaries, and limited-assortment and natural/gourmet-positioned supermarkets, had approximately $638.3 billion in sales in 2014, a 3 percent increase over the prior year.³⁸ Within that broader category, natural product sales through retail channels were approximately $98.6 billion, a 9 percent increase over the prior year, according to Natural Foods Merchandiser.

This trend is expected to continue. According to “United States Organic Food Market Forecast & Opportunities, 2018,” the organic food market in the United States will grow at a compound annual growth rate near 14 percent from 2014 to 2018. The global gluten-free product market is projected to reach a value of $6.2 billion, growing at a CAGR of 10.2 percent by 2018. A 2015 report by TechNavio estimated the global organic food and drink market was $70.5 billion at the retail sales level in 2012, and the firm sees it growing to $223.5 billion at the retail sales level in 2016.³⁹

Notice we used the word trend. A trend is a discernible shift in consumer behavior that has implications on tastes, preferences, and, yes, spending. Companies that fail to keep pace with those shifts run the risk of seeing their business come under pressure, potentially to the point where they could be no more.

This is a shift in consumer preference, which falls into the psychographic aspect of how we look at the world. If you've not heard of this term before, it refers to going beyond simpler demographic information to understand more about consumer lifestyle, behaviors, and habits. We just gave you two examples of shifting demographics; now we'll walk through two examples of shifting psychographics: fitter food and millennial mistrust.

Cocktail Investing Bottom Line

The central point that runs through many of the pain points we've shared throughout this chapter is that shifting demographics and psychographics shape and impact consumer behavior and preferences that can force companies to make fundamental changes to their businesses to succeed. Identifying the root cause of these shifts, be they the fallout from a disruptive technology, changing consumer preference, or other pain point, helps you, the investor, identify companies that will profit from the pain as they administer their soothing “medicine.”

Are these all the pain points? Certainly not. Will there be new ones that come along in the coming years? Without a doubt, and that's why we encourage you to connect the dots you see in your daily life by thinking about the cause of what it is you are seeing and ponder the effect. One of our little secrets is to talk to others about it and see if they are seeing or hearing about it as well. The more confirmation you get, the more comfortable and confident you can be in that developing pain point or trend.

• Pain points are those vexing issues that a company or even a person may have to contend with in business or as part of his or her life.
• This chapter showcased several pain points (cybersecurity, aging of the population, fattening of the consumer, and changing consumer preferences), but those are just a handful, and there are many more.
• Pain points can offer investors fantastic opportunities, provided they identify those companies poised to benefit from the pain point and avoid those that will be the victim.
• When putting an industry or a company under the microscope, always ask the following questions: “Is there anything going on—today or on the horizon—that could force the company to change or impact its way of doing business? Is that a potential opportunity or a threat?”
• The more confirming data points you encounter from articles, studies, third-party research, or even anecdotally in your life or from people you know, the more comfortable and confident you can be in that developing pain point or trend.

In the next chapter, we will start to put the puzzle pieces that we've laid out over the last few chapters together to help you construct a cohesive view. Think of it as peering through a lot of noise to find an investable signal that you can follow as you get ready to identify investing prospects and whittle them down to companies you want to own.