Old Dogs and New Tricks

Does Tech Boost Stock Returns?

One of the key beliefs of investors is the widespread adoption of technology is a positive value add for society. There is no doubt that railways, the internet and the semi-conductor all contributed to making life easier. 

The corollary is that buying technology stocks in the best approach for long term returns. Just buy the "good" tech companies and sit back.

But is this true?

Many financial folks talk about growth investing which is really about tech stocks as the best approach to growing your wealth long term. Just buy Amazon.

However, take a look at Warren Buffett’s portfolio - it’s chock full of boring old stocks - banks, consumer staples like Coke and good old fashioned energy. All these companies form the backbone of our economy. Yes, he has Apple but these days Apple is more an infrastructure stock than a tech company (I think it is an infrastructure stock for the new world). 

For all the chatter and hype about artificial intelligence, you probably shouldn’t expect Nvidia to be around in 100 years. It might be there but given the propensity of tech companies with no competitive advantage to die in the long term, we should not be surprised if it’s not.

Our Well 3 session, Durable Competitive Advantage shows the tech sector has the highest company failure rate. One of the major reasons is because most tech companies don't have a competitive advantage. Once a new technology is widely adopted, like the internet, there is no competitive advantage and so the company just becomes like all other companies in their sector.   

So what to do?

Recent studies have shown that ‘value’ and defensive type companies bought when undervalued deliver superior returns. Not tech stocks!  

The study shows that technology doesn’t populate the list of companies which produce superior long term returns. Growth companies nor their stock returns grow forever. Yes, there is the odd one like Nvidia but if you look at the chart, it is the past 4 years where Nvidia has made the bulk of the returns which catapults it into the best performers category. 

But the question is will it be there in another ten, twenty or thirty years? 

Looking at the best stock returns and you start to notice they are mainly from old industries - tobacco, energy/oil, healthcare, consumer staples. And they are often depressed when most investors are looking for the next big thing. At the moment and at the top of most stock market bubbles you’ll find tech stocks all promising a 'new era'.

Over the long term, you are more likely to build wealth by purchasing boring old companies when they are depressed. And there are plenty that are depressed at the moment. Like energy:)