On Your Markets, Get Tech, Go!
Tech disruption is great for consumers.
1 November 2021
It’s even better for investors, as it can make (or break) investment returns, writes John Berry.
Unexpected product developments can slash prices, make existing technology obsolete, or create valuable new markets.
In 2017, the five largest US-listed companies were all from the tech sector: Apple, Alphabet, Microsoft, Amazon, and Facebook. This is a first – not even during the dotcom boom was tech so dominant.
Disruptive technology has high potential returns. In the last two years, technology stocks have delivered investors returns that are well above average: 49 per cent over 2016–2017.
But tech can also turn winners into losers.
Kodak dominated photographic film sales for decades, with nearly 90 per cent of the US market. Yet it didn’t commercialise its digital camera invention, fearful of disrupting its market. Canon, Sony, and Nikon took over and Kodak, which used to be one of the world’s most valuable brands, went bankrupt in 2012.
What you should know about technology
Before investing, it’s wise to start by examining the unique features of the tech industry.
Tech growth should not be underestimated. Our brains are wired to visualise growth as linear (i.e., a straight line). But technological change is exponential (becoming more and more rapid). Tech share prices can move much faster (both up and down) than you’d think possible.
Innovation can create monopolies.
When a new idea grows into a well-established tech business, it can have few competitors, high entry barriers, and high margins. These are characteristics of a monopoly (a company that can control its market).
- Invention is not always disruption. Horse-drawn vehicles dominated 19th-century transport and were initially unaffected by the car, which was a radical but expensive invention. Disruption came in 1908, not from the car itself but from Henry Ford’s innovative mass-production processes.
- Regulation can hit tech hard. Global regulation is a key risk for tech investors. For example, data-protection regulation could hurt ‘big data’ (large volumes of customer data, analysed for commercial gain). Road taxes on electric vehicles would slow sales. Uber has already been hit by regulation in the UK, and will soon face tighter regulation across Europe.
Where to invest
Let’s look at some key technology developments:
Industrial automation is where robots, control systems, and software perform an industrial process. Robots are now combining with artificial intelligence to self-improve how they operate. Automation is disruptive – it comes at a lower cost and is faster and more accurate than traditional manufacturing.
Social media has evolved into online communication platforms for real-time content sharing, collaboration, and networking. Its growth has disrupted media companies by siphoning away money previously spent on traditional content and advertising.
Renewable energy challenges traditional fossil fuels as the world’s energy source. Concerns around climate change, improved technology, and government regulation are driving its growth. Solar, wind, and energy storage are the big winners.
Electric (and autonomous) vehicles will change the face of transport over the next decade. Some of the world’s largest energy and car companies will be left stranded. Don’t assume Tesla will own this space – established car companies are investing heavily.
Artificial intelligence is like a modern-day space race, according to Russian president Vladimir Putin. ‘Machine learning’ techniques replicate human neural structures and allow computers to become proficient. Companies with large research budgets, like Google, Amazon, and Baidu, are leading the way.
3D printing creates a solid object of virtually any shape from a digital model. Hardware is getting cheaper and will be as disruptive as mass-production techniques were 100 years ago. Anything can be printed – musical instruments, teeth, clothes, and even houses.
Gene technology has seen a breakthrough with the discovery of CRISPR, allowing changes to human DNA. (CRISPR stands for Clustered Regularly Interspaced Short Palindromic Repeats.) Using these ‘molecular scissors’, science will in time be able to repair genetic mutations in humans, plants, and animals. This will disrupt healthcare (possibly preventing hereditary conditions such as heart disease) and agriculture (creating drought-resistant crops). This will be an area to invest in.
In the past 250 years, humans have transitioned through three industrial revolutions.
The late 18th century was the era of mechanical production, railways, and steam power. The late 19th century saw the emergence of mass production, electrical power, and assembly lines. The 1960s brought automated production, electronics, and computers.
We’re now entering the fourth and most exciting revolution – artificial intelligence, robotics, and much more.
As you can see, tech emergence – and disruption – is creating great opportunities for investors. The options range from speculative, fledgling ventures to well-established global corporates. And investors have the choice of selecting individual listed tech companies or a global-equity fund manager that includes tech stocks in their global funds.
First published Autumn 2018
Story by John Berry
John Berry is CEO of Pathfinder Asset Management, which is a responsible investment specialist.
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