The investment world is undergoing a seismic shift, driven by the relentless march of digitalization. Traditional metrics and philosophies are being challenged, and new paradigms are emerging. This transformation is not just about technology; it’s about redefining the very rules of wealth creation.
In the past, value investing and growth investing were the two dominant philosophies. Value investing focused on the price of companies, while growth investing looked at their potential. For much of the 20th century, value investing came out on top. However, the new millennium brought a dramatic change. The years preceding the dot-com bust marked a turning point, and since then, value stocks as a group have underdelivered. The wisdom that applied for more than half a century suddenly didn’t work for the largest, most valuable group: tech stocks.
The Rise of Tech Money
The dominance of growth stocks has soared with every new tech wave, from mobile to cloud, blockchain, and AI. The ratio in favor of growth investing has gone exponential. This is not to say that there will be no more reversals, but after every reversal like the dot-com bust, tech has come back stronger. Sometimes, things indeed are different. Welcome to the rise of tech money.
A paradigm shift has been kicked off. The age of technology has given birth to the largest and most powerful companies in history, and most profitable. They cannot be ignored in any portfolio. But the tech age has also fundamentally changed the rules of the investing game. Traditional metrics like P/E ratios are hardly of any help when valuating high-growth tech companies, especially those building their business around emerging technologies.
Technological Cycles: The New Backbone for Long-Term Portfolio Growth
Assumptions of growth are at the core of every investment decision in the tech sector. That is exactly why it is so difficult to be successful. Technological growth in most cases comes unexpected or delayed, but then exponentially. Other times it stays away completely. This is where technological cycles can help.
There are models that tell you about how the maturity of a technology develops. Others describe hype cycles and what they mean for mass psychology. And some concepts even tackle large techno-economic paradigms, which despite their birds-eye view can be helpful in answering very concrete questions. All of those approaches can help investors find a good time for entry into a technology so that they can benefit from exponential growth curves ahead.
Particularly helpful are concepts that describe the user acceptance and the market penetration of a technology. There are empirically proven thresholds that investors should look out for. For example, if a technology manages to climb to a 15-20% market share, the likelihood of it ever failing drops significantly. Hence, this is one of those ideal points in time when the risk-reward ratio is most favorable.
The Kingston Technology Story: A Lesson in Timing and Strategy
The story of Kingston Technology offers a compelling case study in the power of timing and strategy in the tech sector. Founded by two immigrants, John Tu and David Sun, the company’s journey is a testament to resilience and foresight. The duo sold their initial venture, Camintonn, for $6 million, only to see their fortunes evaporate during the 1987 stock market crash. Undeterred, they founded Kingston Technology in a garage, opting to assemble memory products from components sourced from other manufacturers.
This strategy proved highly successful. Within nine years, Kingston reached a valuation of $1.8 billion, with SoftBank acquiring an 80% stake for $1.5 billion. However, the story doesn’t end there. In 1999, during the dot-com bubble, SoftBank offered to sell back the shares to Tu and Sun for $450 million. Seizing the opportunity, the founders reacquired their company and transformed it into a colossus worth approximately $150 billion today.
The Kingston Technology story underscores the importance of understanding technological cycles and market timing. It also highlights the potential for exponential growth in the tech sector, even in the face of significant setbacks.
