Should You Invest in Technology Stocks?

“One of the lessons of the past 40 years of globalization is that you can’t click your heels together, and say, “There’s no time like 1965.” It just doesn’t work…”

– Alec Ross; Innovation expert, author, and entrepreneur

should you invest in technology stocks

In the coming decade, technology stocks offer more potential than any other sector. In fact, I would go as far as saying that 10 years from now, the only path to billionaire status will be founding a technology company.

This isn’t to say the world will run short of real-estate tycoons and financial oligarchs because, well, that’s never going to happen. Trust-fund babies are part and parcel of capitalism. But it’s important to remember that this slice of America is wafer-thin—the rest of us are still trying to build a fortune of our own.

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How are we supposed to do that, though? Median wage growth is flat and has been since the 1980s. A man that turned 55 years old in 1987 earned $136,400 MORE in his lifetime than a man that turned 55 years old in 2013. (Source: “Median Male Lifetime Income Shows a Downward Trend,” The National Bureau of Economic Research Digest, August 2017.)

Job security is virtually non-existent. Outsourcing and automation keep a boot on the neck of the working class. And, at the same time, the cost of living is soaring.

Between 1975 and 2015:

  • Home prices soared 463%.
  • Car prices jumped 722%.
  • Sugar prices surged 400%.
  • Coffee prices spiked 338%.

One could argue that these numbers are a magician’s trick. Nothing costs what it did in 1975 because inflation is a naturally occurring phenomenon. It creeps up over time, eating into the value of money till $1.00 isn’t really $1.00 anymore.

For example, the cost of attending a private college was roughly $3,776 in 1975. If that price stayed true to inflation, it would have risen to $16,475 by 2015. We would be no worse off in this scenario, because the value of our money weakened at the same rate. However, the real price of private college is now $42,419, suggesting that something more sinister is at work.

MIT Professor Andrew McAfee calls it the “great decoupling.” He claims there are two stories about the U.S. economy. One of them is told above; a bleak tale of America’s vanishing middle class, filled with headlines of job losses and depression. The other is of technology stocks like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Tesla Inc (NASDAQ:TSLA), and a hundred others that won’t fit on this page.

According to McAfee, these tech giants make unparalleled wealth for their founders, employees, and shareholders; yet their effects on society are dubious. (Source: “The Great Decoupling of the US Economy,” Andrew McAfee web site, last accessed August 4, 2017.)

“Computers are now doing many things that used to be the domain of people only,” writes McAfee. “The pace and scale of this encroachment into human skills is relatively recent and has profound economic implications…while digital progress grows the overall economic pie, it can do so while leaving some people, or even a lot of them, worse off.”

In other words, investors (what economists refer to as “capital”) are taking home a bigger piece of the economic pie than workers (what economists call “labor”). McAfee isn’t alone in this assessment. He’s got some heavy hitters on his side, including Paul Krugman, a Nobel prize-winning economist, The New York Times columnist, and ex-professor at Princeton University. Krugman writes that “our eyes have been averted from the capital/labor dimension of inequality” but that “we’d better start paying attention.”

Okay, we’re paying attention—what now? Both McAfee and Krugman have a lot to say about government policy, but neither explains what an ordinary American should do in this scenario. A weatherman doesn’t tell you a hurricane is on the way and then drop the microphone. They answer some implied questions, like “Should we leave town?” for instance. Krugman and McAfee avoid this topic because they are scholars. Their job is to bend the arc of history in the right direction. My job is to take their insight and make it actionable.

Most Americans Don’t Trust the Stock Market

Don’t wait for a sudden reversal to the “good old days” when a single income was enough to support a family of four. All the latest economic research shows a divide between capital and labor (investing vs. working), so it’s crucial to position yourself on the capital side. Traditionally, this is done by investing in the stock market, but the 2008 financial crisis drained a lot of faith in equities. Only 52% of Americans say they invest in stocks, a 19-year low, according to Gallup Inc. And this crisis of faith is worst among America’s middle class.(Source: “Just Over Half of Americans Own Stocks, Matching Record Low,” Gallup Inc, April 20, 2016.)

“Nearly three in four middle-class Americans, with annual household incomes ranging from $30,000 to $74,999, said they invested money in the stock market in 2007,” reads the Gallup report. “Today, only half report having stock investments. This 22-percentage-point drop is more than double the changes seen in stock investing among higher and lower income groups.”

These numbers are terrifying. Workers are turning their backs on stocks at precisely the wrong moment. With wages under pressure from off-shoring and automation, secondary incomes are more important than ever. The stock market can help make up the difference in lost earnings, as is evidenced by the 50-year history of the S&P 500 Index:

SPX_50years

Chart courtesy of StockCharts.com

Anyone hoping for a carefree retirement needs to see this chart. It shows that recession or no recession, the stock market pushes onwards and upwards after every correction. And those who panic during a sell-off are almost always making a mistake. But, of course, the trouble is not just if you should invest in stocks. It’s which stocks should you buy.

But They Should Take Another Look at Technology Stocks

I personally believe in technology stocks.

Scientific advancement built the world we live in today, far more than war or politics. You can trace the truth of that statement quite easily through history. Population growth and general human well-being exploded in the 19th century, not because of any treaty or law, but because James Watt built a steam engine that did more than pump water out of flooded mines. He puttered away in his workshop, much like Steve Jobs and Steve Wozniaki would do in a garage 150 years later, except that Watt’s innovation launched the 1st Industrial Revolution. Almost single-handedly, Watt kicked off an economic boom the likes of which no one had ever seen.

There is no question this feat belonged in the pantheon of great human achievements, yet it, along with all the others that came before it, failed in one respect: Namely, that middle class citizens were excluded from investing in this technology. After all, Watt made his great breakthrough in 1765, long before financial markets were open to the masses. As such, the only people able to profit directly from the steam engine were Watt, his business partner Matthew Boulton, and a handful of wealthy aristocrats.

In any case, the material point is this: Technology built the present, so it’s likely going to build the future as well. The big difference between now and then is that retail investors finally have a way to invest in emerging technologies. .
Now we’re able to invest in modern inventors as they are still fine-tuning their creations. It turns out to be just as profitable as you’d imagine. Just take a look at the NASDAQ 100 Index (a technology laden index) versus the S&P 500 and Dow Jones Industrial Average.

NDX_SPX_DJI

Chart courtesy of StockCharts.com

There you have it—a single chart that demonstrates the awesome growth of technology stocks. It’s no wonder that the top list of Fortune 500 companies is populated by technology companies. Thirty years ago that list was confined to oil and automobiles. Now it bears the names of Apple Inc., Google Inc. (now known as Alphabet Inc.), and Facebook Inc.

So to summarize:

  • Working doesn’t pay as well as it used to;
  • Investing pays better than it used to;
  • Investing pays despite financial crashes;
  • Investing is good;
  • Investing in technology stocks is better.