Investing in technology can be perilous, if you don’t have the right plan

We probably live in the most interesting period in human history with the new technological revolution akin to the early days of Henry Ford and his introduction of the assembly line. What took decades in the past is now being accomplished in months, thanks to the recent build-out of connected devices (smartphones etc.) that have linked all of us into one giant ecosystem.

This ecosystem is now allowing for the rapid deployment of technological innovation, creating tremendous efficiencies by drastically reducing the cost of goods and services being sold.

The new business model is to maximize what is termed the network effect, in which a company uses new technology to tap into the massive network of consumers by providing their goods or services for next to nothing in order to get immediate size and scale, thereby creating their own ecosystem. They can then begin harvesting the vast amount of client data such a system generates to introduce highly valued bolt-on services for a fee and begin to rapidly grow their revenue while attracting even more customers.

This method has been so successful for certain companies that they are taking the model and applying it into other sectors. Take Amazon for example, which bought Whole Foods and immediately announced they were slashing some food prices by as much as 43 per cent on Day One.


This has created the existing situation whereby economies are prospering without traditional signs of inflation. Commodities are plentiful and no longer constraining growth by driving prices higher, and consumers are able to buy a lot more with their dollars than ever before and therefore no longer need to demand higher wages.

Central bankers have also kept interest rates so low that although they have inflated certain assets like housing and equity markets it has been offset by higher borrowing by the consumer and low debt servicing costs. This so-called wealth effect and its disruption of the economic cycle has left many central bankers scratching their heads about what to do next.

The elephant in the room is whether this technological revolution is sustainable in a rising interest rate environment, especially as the U.S. Federal Reserve only just begins to unwind its balance sheet this fall.

In the meantime, the new model is wreaking havoc on traditional businesses like the brick-and-mortar retail sector, which is unable to compete with online upstarts. This is something investors should be keenly aware of and they shouldn’t get sucked into the so-called value trap being offered by those sectors or industries currently being disrupted.

For investors, the technology sector can be sexy but dangerous, especially when one has little expertise. It is almost akin to the Sirens in Greek mythology — many are lured by the excitement of the innovation but their investment ends up crashing on the rocky shore.

Investors would be wise to follow Odysseus and stay the course with a predefined plan, including diversification.

We’ve also come across a couple of interesting platforms allowing the more sophisticated investor looking to participate in a diversified manner.


For example, there are some ETFs out there such as the ROBO Global Robotics and Automation Index ETF, which invests in a pool of rapidly evolving robotics technology and Artificial Intelligence companies. It has more than $1.3 billion in net assets, which is not surprising given it continues to set new market highs.

On the private equity side, OurCrowd is an Israel-based equity crowdfunding platform with offices around the world including Toronto. It is built for accredited investors looking to invest alongside well-known venture capital firms by providing access to individual, pre-vetted deals on a company by company basis, or having their funds do so on your behalf.

There are a number of other ways to invest in the sector, but importantly remember it’s one ripe with volatility and often contains a lot of risk, which should be reflected in your portfolio’s overall allocation. Either way, staying on top of it can provide some helpful information with regard to any potential disruptive threats to your more traditional bread-and-butter investments.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

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