Find the Next Disrupter With These Three Laws of Technology
New technology is always making our lives better.
But investing in the tech sector can be both thrilling and worrisome. However, on a long-term basis, the sector far outperforms the rest of the market.
Many years ago, I developed my Three Laws of Technology. These rules have helped me to better understand the ups and downs of the sector and pinpoint future disrupters.
Three Laws of Tech
My first law is that technology always marches on. Many politicians and much of the media believe that technological growth can slow or stop. But engineers and scientists know that’s hogwash.
Advances in technology are recession-proof. For example, around the Great Depression, traffic signals, frozen food, insulin, Band-Aids, aerosol cans, electric shavers, Scotch tape, car radios, penicillin and jet engines were all invented.
My second law is that when it comes to technology, change happens much faster than anyone expects.
For example, in 2009, Tesla (Nasdaq: TSLA) sold a few thousand sports cars. Many people wrote it off as being the science project of a nutjob.
Now Tesla is transforming the automotive, commercial trucking, solar roofing and energy storage sectors. And Elon Musk, Tesla’s co-founder and CEO, is one of the richest people on the planet.
Finally, my third law is that new technology is almost always disruptive and transformative.
Take smartphones as an example. Where would you be without yours today?
The 5G communications platform will enable innovations like remote robotic surgery. That’s just not possible on today’s 4G LTE cellular network.
And over the past few years, energy storage has shifted from pilot installations by a few utilities to a commercially viable market. By 2024, it’s expected to grow thirteenfold.
Technological disruptions are everywhere. You just need to know where to look.
For example, faster computers allowed scientists to map the human genome back in 2003. And since then, we’ve seen some amazing advances in medicine.
We need to look no further than the messenger RNA, mRNA, vaccines developed by Pfizer (NYSE: PFE) and Moderna (Nasdaq: MRNA). Neither of these would have been possible without technological disruptions in the field of medicine.
Let’s also look at the automotive world. We are rapidly moving away from fossil fuel-powered vehicles toward electric vehicles.
There’s plenty of technology making that happen. But that’s just the beginning. In addition to EVs, we are only a few years away from autonomous vehicles. Soon, self-driving cars will be all over America’s roads.
Once that happens, it will trigger another disruption. And it will be in the insurance industry.
Self-driving cars will have far fewer accidents. So who will want to pay expensive insurance when accident rates will be a fraction of what they are today?
Where to Put Your Money
Of course, the simplest way to invest in changing technology is via the Technology Select Sector SPDR Fund (NYSE: XLK). Over the last 10 years, it’s outperformed every other sector, including the S&P 500 Index.
But there are individual companies that have done even better. You just have to find them.
One of my favorites over the years has been Nvidia (Nasdaq: NVDA). It’s the world’s top maker of special chips called graphics processing units.
It’s been several years ahead of its competition for almost a decade. No wonder its 10-year return is 5,460%!
Recognizing that a company is destined to soar can be a challenge. I’ve spent my life working for and investing in technologically disruptive companies.
Some of my favorite places to hunt for disrupters are the EV and green hydrogen sectors. In fact, clean energy is breeding a lot of disruptive companies.
Not every new company in these areas is going to grow by the same margins as Nvidia. But companies with disruptive services or products, good balance sheets, and great people are good places to start looking.
Having several disrupters in your portfolio is not a bad place to start. And if you can find them at cheap prices, so much the better.
The Sweet Spot for Biotech Investing
January 19, 2021
Speculative Biotech Stocks: How to Manage Risk
July 13, 2020