As a late Gen Xer I grew up with computers. From the old Macintoshes they first got in our school, to the video game systems I played in my youth. They all had a profound influence on my life both then and now. So it should come as no surprise that some of my first investments were in internet stocks . I sure believed the internet would change the world.
Dotcom Crash Wipes Out the Internet
Then the dot-com crash occurred. My tiny investment was wiped clean as I learned the folly of not diversifying in one fell swoop. That lesson was a hard one and thankfully one I encountered early in my financial life. But this post is not about that past investment mistake. I already covered it here. It’s more about how the internet did change the world and what it means for your investing.
The Internet Today
Times have changed a lot. When the internet first appeared we all thought it would usher in free music for all, web vans delivery food, and even online pet supplies. It road up to a perilously high return and then plunged to earth. Not long after people wouldn’t touch internet stocks with a twenty foot pole. But since then the internet has come roaring back. Those stocks are riding high again, and this time many of them have earnings.
New Ways of Doing Business Thanks to the Internet
In fact the internet has opened up whole new areas of business and even new types of jobs. But you know what? Those jobs are different then what was expected in the froth of the dotcom bubble. Sure you can order music online, but most of us pay for that service. We might pay for it in bulk similar to a cable subscription from the likes of Pandora, but gone are the mass scale pirating of Napster.
Food Delivery from the Internet
You can also get food delivery, but at least currently having someone do your grocery shopping is still a niche major city move. Instead we have ready made food boxes like Blue Apron, pre-prepped to a variety of meals. It would seem in the food world the act of delivering your food isn’t enough, it’s about helping you to plan your meals from end to end.
Online Shopping from the Internet
As for the online shopping, well yes retail is disappearing. But in a way we can already see the end of massive online retailers as well. The new model is the sharing economy. A concept all of us are familiar with from Uber.
In case you’ve been living under a rock, these companies essentially act as clearing houses for other businesses and even individuals to sell directly to you. So Amazon or Ebay, both feature companies other than Amazon providing product directly to you but using these systems as their outreach to you. Uber in the same way is allowing drivers to find you.
More Perfect Price Information via the Internet
The ramification of this last category is less about lower overhead of physical stores, which everyone once associated with the internet, and more about helping you compare potentially hundreds of different sellers all at once. In a way it is another information play for the internet. A way to make the cost of finding out about market price nearly frictionless. The more competition the faster the price drops to what is actually the market price, bringing things closer to their true market value.
I want to stay on this frictionless concept for just a minute longer as I believe it is the true value of the internet as it stands today. The ability to ensure you are not price gouged by a single store by instantly seeing competitor prices from the internet via your phone is in many ways revolutionary to the way the world does business. It improves the overall productivity of the economy as a whole, thus leading to a higher standard of living for all of us, and a higher stock price for these internet companies. But, back in the late 90s I don’t remember anyone really talking about this particular possibility.
The Internet and Investing in Technology in General
Which really brings me to my point. We talk about the future of new inventions all the time. We even talk about the future of Bitcoin. And the talking heads talk about how these things will be revolutionary. You should invest in them right now as they will change the way we live…
You know what, they very well may be revolutionary. The block chain that underlines Bitcoin may end up being the most revolutionary technology ever. 3d printing may gain mass appeal. We may all live in virtual VR worlds for hours on end sometime in the future. But if the internet is any indication, even if these technologies are revolutionary its impossible to tell how or when.
Defining Success Defines Who Wins
Then again it’s also easy to think about the risks of a technology going the way of 3d television when investing. Here one day gone the next. But we tend to forget how hard it is to define success. A matter of a little difference between one version of success and another can change the tide of which company succeeds and which fail. The shift of support of a government or a large financial institution to blockchain technology could wipe Bitcoin out but still lead to widespread blockchain usage. You never know.
I couldn’t conclude my point on defining success without my favorite example, VHS and Betamax. Both were video players in the 80s, for the younger millenial’s out there. Betamax was the superior technology offering better video quality. But it died out because VHS could provide longer run times. There was a time at the beginning of the technology when no one could have foreseen the winner. No one had defined that success would be based on length.
Failure before Success
The internet gives us one more cautionary tale to investing in these technologies with any sizable amount. It essentially failed before it succeeded. Those stocks crashed and were down for years after the bubble. Some of them you could have picked up at that time for a song, but had you bought via the hype a year before you’d have lost all most everything.
Technology Adoption Curve
Technology is said to follow an adoption curve. First the early adopters and later the main stream. The early adopters are what brings the hype for things like Electric Carts, Bitcoin, or 3d printing. But until and unless the technology passes into the mainstream it will not reach true success. The things is that movement could happen years from now after the technology has matured, like the internet. It could never happen, like our 3d TV example. Or it could happen immediately after the early adopters like fashion often does. As such it is nearly impossible to pick the next big thing from the early adopters noise.
This all brings us back to the recommendation of investing in Index Funds. No matter how much you know a technology or industry you cannot predict the future anymore than anyone else. It’s foolish to believe you can. It’s all right to have a play portfolio with moon shots, but don’t confuse a highly risky investment with a sure thing. With Technology there is no such thing.