The rapid and increasing pace of technological change is making investing for the long term increasingly difficult. Products or services that appear to be unique and irreplaceable today, and a safe investment for years to come, could be overtaken and replaced in just a few years.
Chief executive officers at corporations, and chief investment officers at investment institutions — pension funds, college endowments, charitable foundations, mutual fund companies and investment management firms — must formalize processes within their organizations to recognize what new and emerging technologies will do, or are doing, to their investments.
For example, in 1995 according to International Data Corp., there were about 16 million internet users, but that had climbed to 3.8 billion worldwide at the end of 2018, according to Kleiner Perkins partner Mary Meeker's Internet Trends 2019 report. The full ramifications of this explosion of internet users are now being recognized.
Few investors in 1995 foresaw the dramatic negative effect of the internet boom on the newspaper and television industries. Even fewer saw the impact on privacy and data security of hacking, which has given rise to the cybersecurity industry. Both developments are now recognized.
Few foresaw how digital photography technology would be combined with cell phone technology and greatly damage the camera industry.
Even in the apparently relatively stable world of infrastructure investing, technology is beginning to make itself felt.
As reported in the most recent issue, fund executives overseeing infrastructure investment have realized that comfortable assumptions about the relative stability of the future cash flows from such investments are likely wrong because of the impact of technology.
As Ross Israel, head of Brisbane-based Queensland Investment Corp. Ltd.'s global infrastructure business told Pensions & Investments, the risks facing owners and managers of infrastructure portfolios in the coming five to eight years will be greater than the risks seen in the past 20 years.
Mr. Israel's insight is supported by the Law of Accelerating Returns. According to this law, promulgated by futurist Ray Kurzweil, the rate of change of a wide variety of evolutionary systems, including technologies, tends to increase exponentially because technologies tend to build upon one another at an accelerating rate.
The Law of Accelerating Returns builds on and broadens Moore's law that, in simplified form, states that the overall processing power of computers will double every two years, extending it to a wider range of processes.
While some dispute the Law of Accelerating Returns and argue that the rate of technological innovation has slowed and may actually be declining, long-term investors cannot safely invest on that assumption.
They must consider the possibility that Mr. Kurzweil's law is correct and carefully research the possible effects that technological change will have on the companies and projects in which they invest their fund's assets.
This might take a dedicated team of researchers looking beyond the next year's earnings prospects, or even the next three years, but it should be done. Such a team might require new skills to evaluate this kind of tech-driven risk.