Investing in Disruptive Technologies
Disruptive technologies are of interest to investors because they stand to displace old innovation with new innovation and potentially change the way we live. We recently received a question from one of our readers as follows:
On top of your home page you state: Investing in Tomorrow’s Disruptive Technologies Today”. Reading many of your articles, it looks like many of these companies are in the development stage and are not publicly traded on the stock exchanges. So how does a personal investor get to invest in some of these game changing companies?
This is a great question. At the present time, 44% of the 136 companies we have highlighted are public and the other 56% are private. What good does it do for a retail investor to learn about potentially game changing companies if they are privately held? We would classify the companies we highlight as falling into three distinct categories; private, public, and over-the-counter (OTC).
There are a number of reasons why a retail investor should care about privately held companies. Firstly, these companies may be developing competing disruptive technologies for publicly traded companies you may already hold. Secondly, private companies are typically backed by venture capital firms that are looking for an exit. Two types of exits are acquisition by a public company or an IPO. Both of these exit options open the door for retail investors to gain exposure and therefore knowing about a private company prior to these events taking place leads to more informed investment decisions. Thirdly, you can invest in some private companies through secondary markets such as Sharespost or Secondmarket.
Public companies are available to retail investors both on US exchanges and foreign exchanges. International companies that are only traded on foreign exchanges can provide opportunities for lower valuations as a result of less hype, and currency exposure which provides portfolio diversification. Every retail investor should understand the importance of portfolio diversification and only invest in disruptive technology companies with money they are prepared to lose.
Over-The-Counter (OTC) Companies
In a past article, we highlighted some of the dangers that exist when investing in OTC stocks. The vast majority of OTC stocks are for speculators, not investors. Retail investors may find the value proposition of an OTC appealing and then when the pump is in full effect, interpret the strong price movements as confirmation of the business model’s validity. When they finally do capitulate and establish a “strong and long” investment position, they will inevitably find themselves holding the bag a number of years later. The only reason we feel there is to cover OTC stocks that claim to be involved in disruptive technologies is to warn retail investors of the dangers here. Often times there is very little information available for investors about OTC companies aside from promoters and stock message boards.
Investment banks (referred to as the sell side) produce analyst reports for asset managers (referred to as the buy side). Often times these reports are very extensive, not available to retail investors, and focus too much on complicated financial valuations as opposed to the merits of the underlying technology simply explained. Prior to investing in any disruptive technology, one should be able to understand the value proposition well enough to explain it in simple terms. In recent years, we have seen the emergence of platforms that allow just about anyone to publish articles about publicly traded companies that are then disseminated through many channels such as Yahoo Finance and Google Finance. Many of these articles lack objectivity and contain some inherent bias, usually brought on by a corresponding long or short position held by the author. It is our goal to provide objective, unbiased information to retail investors that will allows them to make informed investment decisions in disruptive technologies.
A few years after we published this article, we did an exhaustive exercise which isolated the 30 disruptive technologies that investors should watch. It’s a good read!