Investing in Emerging and Disruptive Technologies
The trendy thing to do lately is to use your own personal supercomputer – the one nearly all of us carry – to complain about how broken capitalism is. Never mind all the cell towers that transmit those signals, the constant availability of electricity to power them, or the incredibly dense lithium batteries that store the energy to power these incredible pieces of hardware, which are millions of times more powerful than the Apollo 11 guidance computers.
The smartphone is an excellent example of a disruptive technology, one made possible by a whole slew of other disruptive technologies that add exponential value and, in turn, drive exponential returns for investors. Well, most of the time. Technology also happens to be a very volatile sector, which means you can lose money easier than you can make it.
Emerging Technologies vs. Disruptive Technologies
Words matter, so we can’t just use “disruptive” and “emerging” interchangeably. In the words of management consulting firm McKinsey & Company, “not every emerging technology will alter the business or social landscape.”
The miracle nanomaterial, graphene, is a great example of an emerging technology that hasn’t quite disrupted anything yet except the wallets of investors who bought stock in graphene producers. On the other end of the spectrum, we have next-generation sequencing (NGS), a disruptive technology that’s enabled a whole slew of other disruptive technologies such as synthetic biology and gene editing. Investors who bought shares in Illumina early on would have experienced the “exponential returns” we referred to earlier.
30 Emerging Technologies
Before we can start talking about investing in any type of technology, we first need to identify a comprehensive list of themes to describe the technological landscape today. That process began back in 2016 when we consulted with the experts and leveraged their hard work for our own benefit, just like they taught us to do in business school.
We started by creating a technology benchmark from four lists published by subject matter experts, as seen in the below matrix:
|World Economic Forum||Scientific American||MIT Tech Review||McKinsey||Total Score|
|Internet of Things||X||X||X||3|
|Organs On Chips||X||1|
|Systems Metabolic Engineering||X||1|
|Fuel Cell Vehicles||X||X||2|
|Recyclable Thermoset Plastics||X||1|
|Oil and Gas Recovery||X||1|
To this list of 26, we can add four other technologies that our MBAs have been researching over the years:
- Quantum Computing
- Augmented Reality
- Virtual Reality
- Big Data
And that’s where we started, with 30 emerging technologies.
Emerging Technologies in 2020
The next step was to vet the list a bit and remove anything that’s already past its time. The last three technologies in the above list – mobile internet, cloud, and oil/gas recovery – seem out of place because McKinsey listed “disruptive technologies,” while the other three sources listed “emerging technologies.” We will exclude these three along with Slack – a company that builds internal communication tools for corporations – which actually falls under the “cloud” category.
We can then break down the remaining technologies into 12 categories which we cover here on Nanalyze.
Some of you might be wondering why cannabis is on the above list. That’s no mistake, and it’s not just because we smoke the stuff
regularly occasionally. We cover cannabis because there has been an incredibly large number of newbie investors looking to invest in the stuff, and perhaps no other theme – aside from ICOs – has more land mines than cannabis. So, we added it to the list of things we cover, and you can read more in our guide to Investing in Cannabis Stocks and Companies.
Getting back to technologies, we then created a series of guides that summarize the 1,600-plus articles we’ve written about investing in emerging technologies since we began waxing poetic back in 2013. Here are the guides (also accessible from our homepage) along with a list of the 70-plus verticals we cover, each of which links to a collection of published articles:
In these guides and articles, you will find research we’ve conducted on hundreds of stocks, ETFs, alternative assets, and various types of investment vehicles. While a small set of equities provide pure-play exposure to emerging technologies, there’s a much larger number you should probably avoid like the plague.
Pundits always tell you what stocks to buy, but few talk about the ones you shouldn’t. More importantly, they don’t tell you that the chances of stock-picking your way to early retirement is akin to thinking you’ll find your “happily ever after” dancing in some bar on Soi Cowboy. You’ll hear people claim they’ve done it, but you’ll never hear the rest of the horror stories. If 95% of investment professionals can’t beat a market benchmark, don’t think you’ll fare any better. Putting all your chips on one stock will be the biggest mistake you’ve ever made. Diversification is your friend, and it’s why you ought to consider thematic ETFs, like those on offer from ARK Invest.
One of the most well-respected thought leaders at the moment in disruptive technologies – what they call “disruptive innovation” – is a firm called Ark Invest. It defines disruptive innovation as “the introduction of a technologically enabled new product or service that should transform economic activity by creating simplicity and accessibility while driving down costs.” The firm has identified “five multi-trillion dollar innovation platforms” as seen underlined below:
The above diagram includes one new technology to add to our list – immunotherapy – but the rest align with the technology categories we’ve already identified.
Ark Invest has created a series of ETFs around their five key disruptive technology themes. These are actively managed investment vehicles that take meaningful positions in stocks Ark Invest believes will outperform. We recently looked at the top ten disruptive tech stocks for their flagship ETF – The ARK Innovation ETF – which has now amassed $1.6 billion in assets. The largest position in that ETF at the moment is Tesla, which they’ve assigned a $6,000 price target to based on one simple assumption. Tesla has 891,000 test cars out there gathering data, and he who controls the most data will be able to dominate the $7 trillion autonomous driving industry.
Ark Invest also recently partnered with leading index provider MSCI to build a series of global innovation indices as seen below:
- MSCI ACWI IMI Autonomous Technology & Industrial Innovation Index – 446 stocks
- MSCI ACWI IMI Genomic Innovation Index – 200 stocks
- MSCI ACWI IMI Fintech Innovation Index – 156 stocks
- MSCI ACWI IMI Next Generation Internet Innovation Index – 385 stocks
By the time a technology becomes disruptive – meaning a mature market has formed – there are usually pure-play stocks available for retail investors. If you’ve already invested the lion’s share of your savings in prudent investment strategies like a low-fee robo-advisor or a diversified dividend growth portfolio, then you can afford to invest in tech stocks without jeopardizing your wealth.
Investing in Disruptive Technology Stocks
Emerging technologies often seem to take a page out of a sci-fi novel. They are utterly fascinating and so cool that you can’t help but want to invest in them. Every year, the list of emerging technologies evolves. New breakthroughs are added, the duds drop to the wayside, and the successful ones become mainstream disruptive technologies. This evolution from emerging to disruptive has become known as the “Gartner Hype Cycle.”
Many retail investors have bought into the hype cycle, trying to cherry-pick “the next Microsoft” at just the right time. In addition, some technologies evolve in completely unexpected ways, such as how on-demand 3D printing turned out to be a much more viable business than 3D desktop printing.
Generally speaking, there are very few ways retail investors can invest in emerging technologies, because they are often being developed by private startups. Once the technology starts to become disruptive, then you’ll see some pure-plays start to emerge – companies that are hoping to achieve those exponential returns.
Stocks vs. ETFs
There are some strong arguments for investing in technology stocks as opposed to using diversified vehicles like ETFs. You won’t generate exponential returns by investing in an ETF that tinkers around the edge of its benchmark. Nor will you achieve exponential returns by investing in an actively managed ETF because a large portfolio of like-minded stocks only gives you a small percentage of exposure for each asset.
You have to have money to make money, and you have to make a meaningfully large bet on a stock to realize the sort of returns that disruptive technologies can realize over time. For example, we bought shares of Google at the time of its IPO. We still hold the stock today, and we’re not financially independent – nowhere near it. That’s because we didn’t have a lot of wealth back then to invest, and our biggest concern was the $10 trading commission. If 90% of your wealth is well diversified, you shouldn’t be afraid to make some active bets with the remaining 10%. Here are some articles that talk about a few tech companies we have been holding for a while and will continue to hold indefinitely (it’s about time in the market, not timing the market):
- Illumina Stock Price Says Buy Me Now!
- Is NVIDIA Stock Still a Good Way to Invest in AI Chips?
- Making IBM Great Again With Artificial Intelligence
- Is Teradyne an Industrial Robot Stock Yet?
- WTF Happened to Bind Therapeutics?
Don’t recognize that last company? That’s because it went bankrupt and we lost all our money on that position.
No matter how smart you think you are, the market will always find a way to make you look like a complete tool. That’s why we don’t offer up advice, and why the vast majority of our investment dollars are tied up in dividend growth stocks, something we detailed in our report on Quantigence – A Dividend Growth Investing Strategy.
No matter how promising a company you invest in, there is always company-specific risk that can take you out. Don’t put all your eggs in one basket because some Fool gave you a “stock tip” about a tiny 5G stock that’s about to become “the next Microsoft.“
Underlying the 12 broad categories we cover are more than 70 different emerging and disruptive technology verticals which we write about on an ongoing basis. We’re helping you understand technologies – both disruptive and emerging – so that you can make better investment decisions.
Interested in hearing more about investing in disruptive and emerging technologies?