Investing in Technological Revolutions

TL;DR

Investing in technological revolutions may not always lead to high returns due to the presence of major technology bubbles and the inherent uncertainty surrounding the average profitability of new technologies.

Transcript

• Exciting new technologies and the companies that create them seem like obvious investment opportunities. Why wouldn't you want to invest in the companies leading a new world changing technological paradigm. Each past technological revolution has changed the world in profound and distinct ways. But their relationship with financial capital has bee... Read More

Key Insights

• 👁️‍🗨️ Technological revolutions have a consistent pattern involving incremental advances, turbulent installation, a major technology bubble, collapse, regulatory re-composition, and organic growth.
• 👁️‍🗨️ Major technology bubbles have historically resulted in low returns for investors, as seen in historical examples such as canal mania, railway mania, and the dot com bubble.
• ✋ Higher uncertainty about the average profitability of new technologies can lead to higher stock prices, and as uncertainty decreases, stock prices can fall.
• 😘 Betting on winning companies in technological revolutions has not historically produced high returns. Investing in declining industries or companies with low prices has been more successful.
• ↩️ Investing in technological revolutions is one of the least successful investment strategies, with stock returns exhibiting positive skewness and a small number of stocks producing exceptional returns.
• 😘 The chances of picking winners before the fact in IPOs and venture capital investments are low, as most stocks and financings produce poor returns while a few generate significant gains.

Questions & Answers

Q: What is the pattern observed in technological revolutions?

Technological revolutions follow a pattern involving incremental advances, turbulent installation, a major technology bubble, collapse, regulatory re-composition, and organic growth.

Q: Why do technological revolutions often result in low returns for investors?

Technological revolutions are accompanied by major technology bubbles, which lead to inflated stock prices. When these bubbles burst, investors experience low returns.

Q: How does uncertainty affect stock prices in technological revolutions?

Higher uncertainty about the average profitability of new technologies can lead to higher stock prices. As the market learns about profitability, uncertainty decreases and stock prices can fall.

Q: Is it a good idea to invest in the companies leading technological revolutions?

Historical data shows that betting on winning companies in technological revolutions has not produced high returns. It is better to invest in declining industries or companies with low prices.

Summary & Key Takeaways

• Technological revolutions have a consistent pattern, starting with incremental advances and innovations that culminate in a new technology. This phase is followed by turbulent installation, a major technology bubble, collapse, regulatory re-composition, and organic growth.

• Historical data shows that technological revolutions have often been accompanied by bubbles, resulting in low returns for investors. Examples include canal mania, railway mania, the great depression, and the dot com bubble.

• Mathematical models show that high uncertainty about the average profitability of new technologies can lead to higher stock prices. As the market learns about profitability, uncertainty decreases and stock prices can fall.

• Stocks associated with new technologies tend to decline as the risk becomes tied to the systematic risk of the old economy. Betting on winning companies in technological revolutions has not historically produced high returns.