Why Technology is the Ultimate Investment Opportunity
Charles Darwin, a pioneer in evolutionary theory, once remarked, “It is not the strongest of the species that survive, nor the most intelligent, but the one more responsive to change.”
These words resonate deeply, not only in the context of nature but also in the ever-evolving landscape of investment.
In the 1950s, European stocks held the favour of investors. However, change was on the horizon.
In the 1960s, the “Nifty Fifty” in the United States emerged, comprising 50 large-cap stocks that became the darlings of investors.
This trend continued into the 1970s when emerging markets and commodities took centre stage in investors’ portfolios.
The same cyclical pattern persisted in the 1980s when Japanese stocks garnered immense popularity among investors.
The 1990s witnessed the rise of American Tech stocks, further illustrating the transformative nature of the investment landscape.
And once again, in the 2000s, emerging markets and commodities experienced a resurgence in investor interest.
Fast forward to 2010, and American Big Tech was in the spotlight, with Apple, Amazon, Alphabet, Microsoft, and Facebook dominating the scene.
As of August 2023, these giants would have made up over 61% of your portfolio, controlling 37.54% of the NASDAQ and 23.65% of the S&P 500.
These tech behemoths have been key drivers of market returns.
Those who invested reaped the rewards, while those who hesitated missed out.
This level of concentration also makes the market more fragile.
Jeff Bezos once said, “the stock is not the company and the company is not the stock.”
Jeff Bezos emphasised the importance of focusing on the business itself, noting that Amazon’s share price declined significantly from $116 to $6 even as the company’s fundamentals were improving.
With a growing customer base and increasing profit margins, Amazon’s potential was just beginning to unfold.
As John Maynard Keynes also noticed that the “markets can remain irrational longer than you can remain solvent”
Yet, the crucial question today is whether Big Tech will maintain its streak of innovation for decades to come.
History serves as an invaluable teacher in this regard, demonstrating the continuous evolution of markets.
But there’s no denying that today’s tech giants hold distinct advantages, with access to vast data reserves that inform their decision-making.
Moreover, they wield market dominance and possess substantial capital for investment, innovation and acquisitions.
Consider the fact that in 2023, Apple, Alphabet, and Amazon collectively earned approximately $2.53 billion in interest on their cash holdings alone.
These Big Tech companies are not only growing stronger but are also becoming integral parts of our daily lives.
Additionally, they possess a unique business model that has the ability to scale and grow internationally with a low capital requirement.
Although global uncertainties persist, such as geopolitical conflicts and economic concerns, market indicators indicate that Central Banks maintain tight policies, inflation remains stalemated, and interest rates remain higher than what we have become used to in the last 20 years.
Looking at historical data we should not forget that the world has suffered several wars, recessions, financial panics, energy shocks, and flu epidemics in the past.
Despite this, the market has done well over time.
While unforeseen macro events are challenging to predict with certainty, the rapid advancement of technology, particularly Artificial Intelligence (AI), presents opportunities to revolutionise various sectors.
This underscores the urgency for investing in technology companies, including Big Tech and other tech firms as long as they embrace innovation and competitiveness for the next decade to come.
As Seth Klarman once said, “Accepting that we cannot predict the future i.e. that there will always be unexpected and highly consequential events is the first step in becoming less fragile and more adaptable. People should be highly sceptical of anyone’s, including their own, ability to predict the future, and instead pursue strategies that can weather the storms of uncertainty and adapt to whatever challenges lie ahead.
YFS Intelligent Wealth Fund Performance vs. IA Global
Awet Ghirmay, Head of Investment Research
More information about our fund, the YFS Intelligent Wealth Fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings: The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
