What is a Technology Business?
Updated: May 17, 2022
Our ancestor who made the first stone tool, perhaps as long as three million years ago, set in motion one of the most enduring of structural trends: technological advance. Indeed, the rapid increase in humans’ brain size is believed to have been driven more by advances in tool technology than by other significant developments in our history such as walking upright, language, or art.
"Even if your timing is dismal, an investment in tech still tends to be a decent one"
We have come a long way since those first stone tools, but if technological advance is part and parcel of who we are and what we do as a species, how should investors best benefit from this most persistent of trends? The word “technology” derives from the Greek “science of craft ” and dictionary.com defines it as “science or knowledge put into practical use to solve problems or invent useful tools”. Thus, any company that is using knowledge to solve problems – which I would say takes in most companies on the planet – could be deemed a technology company. We need a narrower definition.
Investopedia defines the technology sector as that which “contains businesses revolving around the manufacturing of electronics, creation of soft ware, computers or products and services relating to information technology.” This narrows things down significantly and relates technology specifically to electronics and computers. Indeed, this is how tech sectors on most stock exchanges around the world tend to be defined.
But by defining it in such a way, might we end up missing out on technology that does not relate to electronics and computers?
There are plenty of industries where technological advance is not related to electronics. For example, today’s technological advances in the agriculture sector are focused on vertical farming, cultured meat and closed ecological systems, none of which relate – at least not directly – to electronics. The construction sector of the future may benefit from technologies currently being researched. The biotech industry is drawing on a greater and greater understanding of the human genome, and even has ‘tech’ in the name, but biotech companies are not generally considered tech companies.
Making a distinction between the providers and users of technology can also be problematic. Of the big six US tech companies – Facebook, Apple, Amazon, Netflix, Google, Microsoft – only Apple and Microsoft should, strictly speaking, be considered tech companies. The others have used the technology known as the internet to build huge businesses in what are effectively traditional industries: shopping; watching movies; and advertising. And yet they are considered tech companies, quintessentially so.
However one defines a ‘tech’ company, there can be little doubt that companies that are involved in finding new ways to make our lives better – whether in relation to electronics, shopping, healthcare or otherwise – tend over time to make good investments. Yes, there will be those that fail, either because the technology in question proved not to work or they were beaten to the finish line, but technological advance is such that there will always be successes.
Seeking to pick the winners is hard, unless you have some sort of edge in the form of expert knowledge; and even then, there is no guarantee of success. A passive approach might thus be the preferred option.
The Nasdaq is without any question the best-known tech focused stock exchange. Had you bought a Nasdaq Composite Index passive fund at the very top of the TMT boom in March 2000 and not sold it, you would still have made a return of 4% pa.
This excludes admittedly meagre dividends but more importantly it includes the near 80% decline in the index from 2000 to 2003. A purchase in 2003 would have netted you a total annual return of around 14%.
The main point is, even if your timing is dismal, an investment in tech still tends to be a decent one. You could of course choose one of the many actively managed tech funds, but you would need to convince yourself that the manager has the aforementioned edge and that he or she is not going anywhere.
Published in What Investment
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.