Why human ingenuity is a vital driver of investment returns

We can learn a lot from Frederick Smith, the billionaire chairman and chief executive of FedEx, the largest air freight company in the world. His story beautifully demonstrates the relationship between ingenuity and the investor. Back in 1965, in a proposal to his economics professor at Yale University , Mr Smith suggested an overnight air delivery service for urgently-needed items such as medicines and computer parts. Mr Smith, now 78, did not receive much support for the idea. But he decided to bring it to life anyway. He founded FedEx in 1971 and in April 1973, 14 jets took off with 186 packages destined for 25 cities. In hindsight, it wasn’t a promising time to launch a venture that required expensive aircraft consuming large quantities of jet fuel . Oil prices were on the rise and the US economy had fallen into a deep recession . The 1970s were a challenging time for airlines and FedEx was no exception. Despite this, Mr Smith’s idea was popular among consumers. Forty-nine years after its initial deliveries, the company is a global giant with more than 650 aircraft. It took more than two years to make its first profit, yet FedEx became the first start-up in American history to generate more than $1 billion in revenue in less than 10 years, without an acquisition or merger. For investors, the journey has been just as rewarding: if you purchased 100 shares at the initial offer price of $24 in 1978, they would have grown to 3,200 shares and be worth more than $718,000 as of May this year. Mr Smith’s idea is one example of ingenuity that humans have exhibited for centuries. Sticks and stones led to hammers and spears, the wheel and axle, the steam engine and, eventually, semiconductors and jet aircraft. Many inventions have compounded into an ever-increasing body of knowledge. The now-ubiquitous microwave oven can trace its roots to a happy accident. While working on radar equipment in 1945 for Massachusetts-based Raytheon, electronics engineer Percy Spencer noticed that the chocolate bar in his pocket had suddenly melted. His curiosity led to the introduction of commercial-grade water-cooled microwave ovens in 1947 that cost thousands and, ultimately, to countertop units available today for a fraction of the cost. In March 2022, a 20-year-old woman born with a small and misshapen right ear received a 3D-printed ear implant made from her own cells and shaped to precisely match her other ear. Although experimental, the procedure represented a significant advance in tissue engineering and could eventually lead to artificial organs such as lungs or kidneys. One innovation often paves the way for others. And the benefits are widely dispersed throughout the economy, often in unpredictable ways. Apple became one of the world’s most valuable companies based on its clever marriage of the computer and telephone. Both users and shareholders of Apple reaped substantial rewards. My relative, Sir Samuel Instone, started one of the world’s first commercial airlines in 1919 (it merged with Imperial, then BOAC and eventually these became British Airways). He made the world’s first in-flight phone call. His airline was the first to transport a horse and he introduced uniforms for all his flight crews, based on military uniforms. No one thought that commercial air travel would become the enormous industry it is today, compared with what it was back then. However, innovation doesn’t always ensure prosperity (hence all the airline mergers). That is why it is sensible to diversify. Investors are often tempted to focus their attention on companies that appear poised to benefit from innovation. But we can’t predict which ideas will prove successful. Civilisation is full of innovation and evolution; of curious minds seeking to improve upon existing ways of meeting the needs and wants of the consumer. The stock market is an example of such creativity. It has a history of rewarding investors for the capital they supply to fund such innovation. But a significant fraction of wealth created in these markets typically only comes from a small number of businesses. Therefore, owning a diversified portfolio is the most effective way to participate in the rewards of ingenuity and innovation. Diversification also increases the reliability and predictability of investment returns. Sam Instone is co-chief executive of wealth management company AES