How to invest in self driving cars

Self-driving cars are paradigm-shifting technology that is going to change the world. It’s no wonder that tech companies like Google (Waymo) & Tesla are spending billions of dollars to try and build autonomy. The company that wins the race to first automate transportation will be in first in a market potentially worth trillions of dollars. No wonder they are spending so much to capture the market.

Here’s the thing: you could invest in self-driving cars today, for substantially less money.

Before we talk about how to make this investment, we need a framework to evaluate an investment. And if we’re talking investments we need to quote Warren Buffett:

So for our investment framework here, we’re trying to avoid the ‘popular conversation’ on self driving cars and find the unpopular. Even better, the investment doesn’t require crazy math or advanced business training to understand-we’ve already talked about how business school is a waste of time.

The Popular Conversation

­Conversation on self driving cars have typically fallen into one of three buckets:

  • Efficacy: is it even possible?
  • Safety: can we risk it?
  • Job displacement: what about the jobs?

Let’s briefly talk about each one and why they are popular conversation. The reality is, all three are valid points and a book could be written about each.

People tend to have really strong positions here. Either you are a big believer who is ready to rent out their own car, or a staunch opponent who produces a video to argue against it. So which side is right?

For a human, driving a car is not a difficult task. In the US, depending on your state, you can begin legally driving a car at 15…or a full ten years before your brain is developed. There’s literally millions of things a basic computer can beat a 15 year old at. The answer doesn’t change as a human gets older….computers kick our ass at many tasks.

So why are we surprised that a computer can drive a car better than a human?

Yes, the technology is incredibly complex and needs to learn how to adapt to unexpected events. There are infinite numbers of things that can go wrong. But history here always repeats itself: a new technology comes and the conversation focuses too long on whether or not it’s possible. It’s been true of the telephone to the Internet, to billion dollar businesses.

By the time the majority of the population ‘answers’ whether or not new technology can even work, there is no opportunity for investment. So let’s move on to the next topic: safety.

Ever since this crash, the conversation has inevitably been about whether or not self-driving cars are safe enough for use. It’s a fair consideration, and an important conversation to have.

The reality is though: is the conversation worth it? A similar conversation existed when commercial airlines first started flying, and 100 years later, the airlines still fly and crash regularly. Some people still are afraid of flying, but most have accepted the convenience of flying as worth the risk. My best guess is that self-driving cars will follow a similar pattern.

So again, not a ton of investment opportunity here because the conversation is so focused on safety. Let’s talk about job displacement.

Another extremely important topic worthy of a book: what about the estimated 5 million people who drive for a living? Said another way: that’s roughly the population of Colorado. By introducing self driving cars, an entire state’s worth of people will lose their job.

It’s dominated the headlines (herehereherehereherehere) and for obvious reasons: we all know someone who would be directly impacted by the ensuing job loss.

It’s also the reason why companies such as Apple & Amazon are investing specifically in self driving trucks. Product can move faster if trucks don’t need to stop at night for people to sleep, meaning free two day delivery becomes free one day delivery pretty quickly. Product can move cheaper if companies don’t need to pay drivers.

They’re betting that consumer’s happiness over getting product faster and cheaper will be stronger than consumer’s anger about the job loss. And to be fair: they’re going to win that bet.

We talked through the three main points raised for self driving cars, and why all three are valid.

The obvious validity is what they are constantly talked about in the news. But if we follow our Warren Buffett framework of investing in driverless cars, we’re looking for a key insight on self driving cars that isn’t talked about. I also promised you it would cost less than the billions of dollars companies are paying to create the technology as well! 🙂

Self driving cars will change where we will live

The most fundamental change that will come from self driving cars is where we will live. The best investment to make right now in self driving cars is in real estate: the investment rationale makes sense, and following our Warren Buffett framework, no one is talking about it.

There are three things to talk about for this investment to make sense:

  • Where we live now
  • Where we will live
  • How to make the investment

The United States is getting pretty urban. 80% of Americans are in urban environments, defined as: “densely developed residential, commercial and other nonresidential areas.” That statistic continues to grow as our largest cities (NYC, Boston, Chicago, SF, LA) swallow more and more suburbs.

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It’s not just the US. The world is getting more and more urban as people are increasingly giving up life at home for the city life. The UN says today 54% of the world’s population lives in an urban environment, and that’s going to grow to 66% over the next 30 years.

The reasons for the growth of Urbanism are several:

  • Increased automation of farms
  • Job opportunity
  • Love opportunity/friendship

For farm automation, one doesn’t need to look very far to find examples of better farming. Some start ups are even raising a ton of money to build highly automated farms inside, within city limits. 100% of people alive were farmers for a long part of human history: it’s a relatively new phenomenon that only 2% of Americans are farmers now. The other 98% needs to find a job somewhere else!

Which leads to job opportunities: cities just have more jobs. Nearly 88% of American jobs are in cities, and cities generated nearly all of America’s job growth. If you want to get paid, you have better luck if you move to a city. It’s a trend that has been understood and noticed for hundreds of years.

Love opportunity is probably one you don’t think about much. The reality is though, if I’m looking for a significant other, the odds are so much better within a large city.

For example, I used to live in a small town of 8,000 people. Assuming a life expectancy of 80 years and equal distribution of people at each age, there were ~ 100 (8,000/80) people who are my age. If I want to date someone within ~5 years of my age in either direction, there’s 1,000 possible people to date (100 x 10).

I would be interested in a woman, which drops the number of possible people to date to 500. With 26% currently in a relationship and 55% not interested in a relationship, a full 81% of people my age are not eligible for dating.

Suddenly the number of possible partners is 95 (500 x 19%) The odds aren’t great the one for me is in that list.

But if you rerun the numbers for Chicago, the number of possible partners is 3,189. Much better odds here!

The same story applies for friends. If I’m looking for a friend, the odds are much better I’ll find a buddy with similar interests in a big city than a smaller town.

So we live in urban locations because we don’t need to farm, we do need a job, and at least some of us want love & friendship. How will self driving cars change all of that?

Let’s imagine the perfect place to live. We all already know it will include:

  • A job
  • Possibility of love
  • Friendship

My guess is the perfect place to live will also include:

  • Affordable
  • Healthy living conditions (ie: no smog, congestion, safe drinking water)

And that’s the trade off. The desire for a job, love, and friendship means living in a city. The desire for affordability and healthy living conditions means living in a more rural location. Which one to choose? People have had to make this trade off forever.

Self driving cars will change this trade off.

The piece no one talks about is that self driving cars will be incredibly fast. The reasons for this are:

  • Faster driving speed
  • Vehicle to vehicle communication
  • Better driving experience

For faster driving speed, since a computer can drive safer than a human, cars could increase speed from 65MPH on a highway to much faster. It’s hard to say exactly what this speed will be, seeing as regulation will need to be involved to set speed limits. What can be said with some certainty is that speed limits will definitely increase.

As more cars on the road become autonomous, more and more cars on the street will communicate with each other. Think of it like this picture here:

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Today, someone inadvertently braking causes most traffic. It’s why you see a ton of traffic behind a police officer on the side of the road with a pulled over car that suddenly clears up once you pass them. Someone drove by, glanced over, and accidentally hit the breaks started all the traffic.

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Credits to Tallahassee Democrat for the picture

Here’s the thing with cars now communicating with each other: traffic drops, dramatically. The first car driving won’t inadvertently brake because there is no immediate danger. The car behind it is communicating with the first car, and knowing the first car won’t brake, doesn’t brake either.

A ton of studies on this all say the same message: more self driving cars means much less traffic.

Okay so cars are driving faster and there’s no traffic, what about red lights? Waiting at them is a huge time suck while driving. They’re needed today to prevent drivers from hitting each other. Similarly to before, though, if cars are communicating with each other, then what is the purpose of having a red light? The cars shouldn’t hit each other in an intersection if they know where the other cars are going to be.

So now we’ve increased the speed limit, decreased traffic, and removed red lights.

The one caveat here is pedestrians. While this logic holds on busier streets with no cross walks, smaller streets with cross walks will require red lights or another way for people to cross the streets

We’ve all had the experience of sitting in traffic and hating every second of it. As I wrote last time, I typically am in Ubers and use the opportunity to learn from others, as talking with Uber drivers determines success.

If a car is full automated though, it won’t look much like a car. For example, there’s no need for a steering wheel if you aren’t going to be steering! Most concept self driving cars look something like this:

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If ‘driving’ will soon mean sitting in a seat watching TV, it’s the exact same experience as watching Netflix while sitting on your couch! Sign me up for that!

Let’s recap everything that we’ve discussed thus far:

  • The conversation on driverless cars is about ‘popular’ concepts such as efficacy, safety, and job loss
  • Right now, people are moving to an Urban environment for jobs and love/friendship
  • The optimal living environment contains jobs, love/friendship, affordability, and healthier living conditions
  • Self driving cars will be incredibly fast compared to what we think of driving today.

As a result, I think we’re going to see people living further outside cities for affordable living and health reasons, but commute into cities, with self driving cars, for jobs and love/friendship.

For example, Ottawa, Illinois is beautiful, has fresh air, clean water, and cheap rent. It’s also 90 minutes from downtown now.

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With self driving cars, I’d bet that transit time to Ottawa could fall to maybe 30 minutes. With the average commute of Americans being 25 minutes, I’d spend an extra 5 minutes watching Netflix in by self driving car to be able to work in the city and live out here in cheap, blissful countryside.

With more and more millennial’s opting to live in rural or cheaper areas, I’d argue many will be interested in the ‘best of both worlds’ solution provided by self driving cars. Don’t worry though, if you want to go out on the town with your friends, it’s only a short trip away.

So here’s the investment: buy land in towns like Ottawa that are currently too far to commute to the big city.

  • Warren Buffett will approve: no one is talking about it as an investment
  • Your wallet will approve: you can buy land in Ottawa for $19,000/acre
  • Or, if you want, you can buy 50 acres in another town for $6,500/acre

You can keep the land for a decade, then sell it to developers who want to build homes for people utilizing self driving cars to commute into the city.

Is it guaranteed to work as an investment? Nope. But for those who are bullish on self driving cars, it’s a hell of a lot cheaper than spending billions to build an actual self driving car.

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