"Neither Redbox nor Netflix are even on the radar screen in terms of competition.” Those are the words of Jim Keyes, the former chief executive of video rental giant Blockbuster back in 2008.
Just five years after Keyes made that statement, Blockbuster went bust, swallowed whole by the mighty online streaming service that is Netflix.
The lesson to be learnt here? You shouldn’t underestimate disruptive forces, because the threat to business – or even entire industries – isn’t always apparent.
How to protect yourself
Disruptors come in many different guises, so how can you protect against these risks?
Frederique Carrier from RBC Wealth Management says you should assess who can adapt based on a company’s ability to innovate, and whether the management team is willing to “let sacred cows die off”.
Larger companies don’t often capitalise on disruptive tech because they are keen to stay close to their customers – and therefore don’t want to move too far from their existing processes. The size of their systems also makes it expensive for big players to overhaul their business models.
But that’s not to say these “traditional” companies can’t adapt and use tech to prosper – just think of the rise of click and collect in supermarkets.
In many respects, it’s about trying to understand if new technologies are the friend or foe of these companies. Firms that use tech to cut costs for consumers often end up being the winners.
Know your limits
You can’t always know what’s going to be the next best thing. You might be able to see the potential of a new innovative product, but it’s difficult to identify how it will be adopted and which companies will profit.
This valuable lesson was learnt in the dotcom crash of 2000, when investors suffered huge losses after piling into tech startups, despite the fact that many of these young companies didn’t yet have revenues.
Investors still bear the scars following the crash at the turn of the twenty-first century. “History is littered with companies that went bust before their technology reached critical mass,” says Rathbones chief investment officer, Julian Chillingworth.
He says this serves as a reminder of the risks of believing the hype without appreciating how to extract value from the business model.
Valuation, commercial viability, market penetration, and barriers to entry are all things investors should consider when looking at which companies are set to win.
While innovation is the facet of disruption, Chillingworth says it is affordability that is the key driver in the widespread adoption of new technology. For example, it wasn’t until Henry Ford launched the affordable Model T in 1908 that motor cars became disruptive – despite their invention decades earlier.
Investors should therefore watch out for technology that is applied to markets at a low price.
It’s clear also that certain sectors look ripe for innovation. Rathbones points to four areas where there is the real prospect of disruption to the status quo: personalised medicine, automation in the labour market, alternative energy, and blockchain.
How to reap the rewards
We’ve seen the Nasdaq index surge over the past fortnight – bolstered by huge gains made by Amazon. And while every fund sector was in positive territory in October, it was technology that led the way.
But what’s the best way to benefit from these gains? “You need to look at tech from different angles,” says Ben Yearsley, director at Shore Financial Planning.
“The reality is that there are many tech behemoths that form part of everyday life – Amazon, Google, Apple, and even the once maligned Microsoft are integral. Whereas hype stocks, such as Tesla, are trading at huge multiples, hoping to be tomorrow’s giants.”
Both Google and Amazon have been on a buying spree, using their surplus cash to purchase smaller companies, potentially reducing the threat posed by rival technologies. With this in mind, you could say the current tech giants are the safest bet from an individual stock perspective.
But by far the best way to invest in tech is through active fund managers, who spread your risk among a number of companies. As Chillingworth puts it: “passive investors run the risk of holding a portfolio of canal operators just as the railway companies are about to take off”.
Some funds invest specifically in tech firms, such as Polar Technology, but Yearsley says it’s also worth considering Asian funds.
Many world leading tech stocks, such as Samsung, are based in Korea and Taiwan, while China has stocks such as Tencent and Alibaba. The investment veteran points out that the Schroder Asian Alpha Plus fund has these tech stocks in its top ten holdings.
In the future, every company will be a tech company. But figuring out which companies will lead the way – or simply survive – is the tricky part.
Ultimately you should keep your eye on the ball and assume no business is immune from disruption.