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Investing in Emerging and Disruptive Technologies

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The trendy thing to do lately is to use your own personal supercomputer – the one nearly every one of us walks around with – 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 that 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 all add exponential value, which in turn drive exponential returns for investors. Well, most of the time anyways, because 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 McKinsey, “not every emerging technology will alter the business or social landscape.” 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 need to first 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
NextGen Batteries X     X  2
Blockchain X        1
Advanced Materials X     X  2
Autonomous Vehicles X   X X 3
Organs On Chips X        1
Renewable Energy X   X X 3
Artificial Intelligence X X   X 3
Optogenetics X        1
Systems Metabolic Engineering X        1
Fuel Cell Vehicles   X X    2
Robotics   X   X  2
Recyclable Thermoset Plastics   X     1
Genetic Engineering   X  X    2
3D Printing   X   X  2
Distributed Manufacturing   X      1
Drones   X     1
Neuromorphic Technology   X      1
Digital Genome   X X X 3
Gene Editing     X   1
Conversational Interfaces     X    1
Reusable Rockets     X    1
Slack     X   1
Mobile Internet       X 1
Cloud       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.

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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.

Investing in Emerging and Disruptive Technologies 2
Credit: 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 emerging technology investing topics 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:

Investing in 3D Printing

VERTICALS: 3D Printing Metals, Distributed Manufacturing, 3D Bioprinting

Investing in Fintech

VERTICALS: Alternative Data, Personal Finance, Alternative Asset Classes, Venture Capital

Investing in Artificial Intelligence

VERTICALS: AI Healthcare, Computer Vision, Natural Language Processing, Chatbots, AI Chips, Robotic Process Automation (RPA)

Investing in Augmented and Virtual Reality

VERTICALS: AR/VR Hardware, VR Content, AR/VR Enterprise Applications

Investing in Green Technology

VERTICALS: Renewable Energy, Energy Storage, Water Tech, AgTech, Electric Vehicles, Food Tech, Recycling

Investing in IoT

VERTICALS: Supply Chain Technology, IoT Sensors, Industrial IoT, Smart Cities

Investing in Life Sciences

VERTICALS: Genomics, Human Longevity, Medical Devices, Brain-Computer-Interfaces, Genetics Testing

Investing in Nanotechnology

VERTICALS: Nanomaterials, Synthetic Biology, Gene Editing

Investing in Space

VERTICALS: Global Internet, Satellites, Geospatial Intelligence, Space Tourism

Investing in Computing

VERTICALS: Blockchain, 5G, Software Development, Biometrics, Cybersecurity, Quantum Computing

Investing in Robotics

VERTICALS: Drones, Autonomous Vehicles, Industrial Robots, Robotic Surgery

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, a much larger number you should probably avoid like the plague.

Pundits always tell you what stocks to buy, but none talk about the ones you shouldn’t. More importantly, they don’t tell you that thinking you can stock-pick 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. Trying to put 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.

Disruptive Innovation

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. They define 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:

Investing in Emerging and Disruptive Technologies 3
Credit: ARK Invest

The above diagram includes one new technology – immunotherapy – but largely aligns with the technology categories we’ve already identified.

Ark Invest then created a series of ETFs around these disruptive technology themes. These are actively managed investment vehicles that take meaningful positions in stocks they believe will outperform. For example, their largest position at the moment is in 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.

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 making it the most disruptive disruptive ETF out there at the moment. They’ve 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

As you can see, by the time a technology becomes disruptive, 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 be investing in tech stocks without jeopardizing your wealth.

Investing in Disruptive Technology Stocks

Disruptive technologies often seem to take a page out of a sci-fi novel. They are almost always very interesting to learn about, and many of them sound so cool that you can’t help but want to invest in them. Every year, the list of emerging technologies will grow to represent new breakthroughs and shrink to represent technologies that a) didn’t prove to be economically viable and were laid by the wayside or b) were so economically viable that they became mainstream disruptive technologies. All the while, the remaining emerging technologies travel slowly along what is commonly known as the “Gartner Hype Cycle.”

Investing in Emerging and Disruptive Technologies 4
Credit: Gartner

That hype cycle you see above has cost many the retail investor who thought they would cherry-pick “the next Microsoft” and then automagically time the market just right, all while controlling their emotions. Not to mention that sometimes technologies start off with the wrong business models and eventually discover the right ones, 3D printing being a good example.

Generally speaking, there are very few ways for retail investors to invest in emerging technologies because they are often in the form of early stage startups. Once the technology starts to become disruptive, then you’ll see some pure-play stocks start to emerge – companies that are reaping the rewards.

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 some ETF that tinkers around the edge of their benchmark. Nor will you achieve exponential returns by investing in an actively managed ETF because these are generally a large portfolio of stocks that give you a small percentage of exposure for each asset.

You have to have money to make money, and you have to take 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 their IPO. We’re still holding them 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 calculated active bets with the remaining 10%. Here are some articles that talk about some 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):

Don’t recognize that last company? That’s because they 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.“

Conclusion

Underlying the twelve broad categories we mentioned earlier are more than 70 different emerging and disruptive technology verticals which we cover on an ongoing basis. That’s what we’re doing here at Nanalyze. 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? Sign up for our weekly newsletter. 



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