Capitalism is brutal, and right now, the world is going through an extended period of disruption. The combination of new technologies and easy money policies have driven a revolution in the tech sector.
I don't want to comment on whether or not these developments are good or bad. I think they have their benefits and drawbacks.
Technology has helped increase efficiency and reduce prices for consumers in some sections of the market. Still, in others, this has come at the expense of worker wages and reduced worker bargaining power in the gig economy sector (thus, consumers overall have declining buying power).
Investing in this environment is challenging, especially when one is looking for opportunities outside the big tech arena.
Even though I could argue that companies like Apple (AAPL, Financial) and Microsoft (MSFT, Financial) are really the only tech stocks an investor would need to own to get exposure to most of the industry's key themes, I think this investment strategy overlooks the diverse and rich and nature of the technology sector.
In many ways, tech investors today face the same problems that they faced back at the turn of the millennium. In the period many refer to as the dot-com bubble, money was flowing into technology stocks worldwide. These businesses promised to revolutionize the global economy, using the internet to transform how the world worked and lived.
As we now know, many of these companies failed, mainly because they were ahead of their time and didn't have the ability to deliver on their lofty promises to investors.
Today, the buzz around tech stocks is not the same, but it is similar. Venture capital and private equity funds are shoveling money into the latest ideas, even if the company has never had any realistic prospects of earning a profit. I am not going to directly compare the dot-com bubble and today because I think we are in a different monetary environment. Still, I believe it is important to note that there are some similarities.
I also think it is essential to understand how investors viewed the market in 1999, as this could provide some guidance for today's market.
When casting his eye over the market environment in 1999, the Oracle of Omaha, Warren Buffett (Trades, Portfolio), noted that it was "hard to predict exactly how" different technologies would impact different sectors over the following decades.
He was backed up by his right-hand man, Charlie Munger (Trades, Portfolio), who said, "it is tricky predicting the technological change. Either it will or won't destroy some business."
These thoughts remain just as relevant today. It is impossible to tell which technologies will still be around a decade from now and which will have fallen by the wayside. This is why it is so tricky to invest in the sector.
However, if there is one thing that has remained constant over the past few decades, it is the power of brands.
In 1999, Buffett noted brand power would be important no matter what. Giving the example of Tiffany (TIF, Financial), he explained:
"I would argue that Tiffany has such an advantage... brand names are going to mean very, very much when you have literally, you know, thousands and thousands of choices. People have to trust somebody. And I think that Tiffany has a name that people would trust."
Twenty-one years later, and Tiffany's brand is as strong if not stronger than it was in 1999.
There is one lesson we can take away from this look back at history. Technological change will always be a risk investors face. The only way we can try and swing the odds of success in our favor is to stick with businesses that have a strong brand. This should allow them to remain at the forefront of consumers' minds and help navigate technological change. It is not guaranteed, but having a solid brand will certainly help.
