“Technology made large populations possible; large populations now make technology indispensable.”
Tech Stocks These young geniuses pocket enormous sums of money by solving seemingly intractable problems. Rather than simply poaching market share from older companies, they use technology to create win-win situations, thus opening up new spaces of commerce.
They are the “creative” part of “creative destruction,” yet the sight of them can stir feelings of panic in the average investor.
“Why them?” says a little voice in the back of our heads. “Why not me?”
While envy is the easiest road to walk in such cases, this article offers (or at least I hope it does) a different path. The first step in walking this path is to accept that young Pimple-Faced Geniuses (PFGs) are a good thing. Not just for society at large, but for YOU as well.
It may seem a little strange at first, because we are raised to think in zero-sum terms. From our earliest days, we are told that success is finite—that if your slice of winning gets smaller, someone else’s must have gotten bigger. It’s a very seductive way of looking at the world, and, to be quite honest, it’s often true.
Example #1: Netflix, Inc.
Netflix, Inc. (NASDAQ:NFLX), for example, managed to add new value to the television industry. Over 104 million users flocked to its streaming service in the last decade, hungry for its all-you-can-watch buffet of movies and TV shows.
Collectively, these subscribers watch one billion hours of content every week. One billion hours a week. Videos load without a second of advertising or buffering, giving customers an uncomplicated viewing experience that they didn’t realize they were missing.
Meanwhile, Netflix continues to add subscribers, revenue, and gains to its share price. That counts as a win for Netflix. And the ability for two wins in a single transaction is what makes technology special.
Below is a chart showing the performance of NFLX stock and CBS stock over the last 10 years. It demonstrates exactly what I’m talking about.
Chart courtesy of StockCharts.com
You can see that Netflix stock far outstripped CBS stock. However, investors would still have doubled their money on CBS, which would not have happened in any other industry. History is full of exactly the opposite.
Example #2: Facebook Inc
The story of Zuckerberg creating Facebook Inc (NASDAQ:FB) in a college dorm is now more than legend—it has passed into cultural mythology. However, the trouble with mythology is that it often rewrites history.
We forget, for instance, all the raised eyebrows at Facebook’s $1.1-billion acquisition of Instagram. FB stock was mere months away from its initial public offering when Zuckerberg decided to offer his competition the carrot instead of the stick. Investors did not look upon the deal with a kind eye.
In creating Facebook, though, it’s not clear that Zuckerberg was “taking down” an existing industry. There were forerunners of social media, like MySpace and Friendster, but they fell apart for other reasons. In this example, technology created an entirely new industry where none had previously existed.
Once again, this is a feature that is exclusive to technology companies, and it pays extraordinarily well. Just look at FB stock’s incredible run over the last five years.
Chart courtesy of StockCharts.com
All this is by way of saying that technology investments are unique. Economists speak often and loudly about how technology is the key to national productivity, which in turn is the only fuel for economic growth in advanced nations. These two facts are connected.