Investment lessons from technology cycles

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Historical technology cycles deliver valuable lessons for investors. From the introduction of the railroads to the electric light through to radio, telephone and mainframe computer, the investment lessons resonate.

Take the automobile. When Henry Ford introduced the Model T into mass production in 1908 there were literally hundreds of car manufacturers trying to make the breakthrough. As we know, only a handful survived.

The lesson is two-fold. Firstly, it is very difficult to pick the winners from a major technological shift. Secondly, the key thing to do as an investor is to avoid the disrupted sectors, in this example the horse and cart manufacturers.

Diversity in Europe

Europe as an investable region is rich in diversity, with German and Swiss engineering excellence, Italian and French consumer brands, Scandinavian pragmatism and Michael O’Leary joining it all up.

European capital markets have come a long way but are still dominated by large sectors facing structural disruption. It is a region awash with horse and cart businesses!

An unconstrained approach

A stock picking, unconstrained approach is essential in navigating this diversity. Many established funds are unable to invest in the smallest companies for size and liquidity reasons.  This is a double whammy - meaning not only exclusion from investing in the most interesting smaller companies - but also being forced to invest in the horse and cart companies, prevalent in most large-cap indices.

An unconstrained approach must include the ability to invest in smaller companies where the most price inefficiency and value exists. This is often where many of the most compelling investment opportunities are to be found. More than half the companies in a European universe are smaller companies.

Source: Factset and Chelverton

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This information is only intended for Professional Investors. Not for Retail Clients. Past performance is not a guide to future performance and the value of an investment and any income from it can fall as well as rise because of market and currency fluctuations. Your clients may not get back the original amount invested. Investments in smaller companies may be higher risk and more volatile than investments in larger companies.