Here's what Silicon Valley is teaching investors

Silicon Valley has been an undoubted success story in recent years, with innovation workers there producing the highest added value per employee in the country - $225,000. The quest for their secret sauce is on, and last week I was in Silicon Valley with members of UBS's Industry Leader Network – executives and entrepreneurs at privately held companies worldwide – discussing the factors driving Silicon Valley's success that might be replicable for investors and businesses alike.

 Big data

 Both groups stand to learn a lot from the ways in which the Valley uses 'big data' to generate insights and business applications. In retail, online retailing platforms and networks can already collect huge volumes of user statistics. Even physical retailers can track customer movements within stores through their smartphones, and marketplace owners can track footfall through WiFi access. What many firms still need are ways to take this data and use it to improve their marketing efforts and shopping experience.

Meanwhile, investors have long fared better by ignoring geopolitical noise and focusing on economic data, which might give the machines an advantage in the competitive world of investing as well. The next step to utilization of 'big data,' for example aggregating large volumes of bottom-up information, could allow for more real-time insights, allowing select active managers to stay ahead of the pack.

The next step to utilization of 'big data', could allow for more real-time insights, allowing select active managers to stay ahead of the pack.

The internet of things and artificial intelligence

Although productivity gains in manufacturing have slowed in recent years, an area of significant potential is manufacturing systems managing themselves via predictive maintenance: examining why machines go down, how long they go down for, what steps were taken to fix them and connecting these insights from the factory floor to administrative offices.

For investors, this type of shift will lead to a fundamental change in the way that investors need to think about market sectors and their drivers. The move toward more predictive insights also brings promise of finding new understandings of the ways in which financial markets and economies interact, although such insights will of course need to be treated with caution in such a complex system.

An innovation culture

The final point is non-technical, but arguably the hardest to achieve in established businesses - a culture of innovation - the incentive and drive to innovate and the willingness to fail. Valley success stories have generally come from investing in an emergent trend with little certainty about the potential end market, or even how it might be successfully monetized. For established businesses it will be a fine line to tread between careful capital allocation required to run a business, and the willingness to invest in the unknown.

Having the courage to go against the grain is a key part of keeping portfolios fit for purpose.

This innovative mindset is also key for investors. A tight focus on past performance, track records, and established strategies can feel 'safe'. But it can also lead to markets exhibiting herding behavior, ultimately to the detriment of all participants. Having the courage to go against the grain, be it through anti-consensual ideas or cutting-edge investment strategies, is a key part of keeping portfolios fit for purpose.

Silicon Valley isn't technologically perfect. (Try calling San Jose from San Francisco without losing your cell phone signal.) Nevertheless, it has driven significant growth in the US economy in recent years. Lessons from the Valley – big data analysis, artificial intelligence, developing an innovation culture – can help investors and businesses bring similarly enviable growth rates to their own bottom lines.

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