When new technologies emerge, euphoria and disappointment are never far behind. The success of an innovative technology is rarely predictable. What can investors do to manage risk while still participating in the success of genuine innovation?
When Steve Jobs unveiled the iPhone in 2007, he changed everything. Less than two decades later, daily life without a smartphone is almost inconceivable. These devices have worked their way into every corner of our daily routine. Whether making calls, listening to music, reading news, buying tickets or paying for coffee - we reach for them constantly.
Yet the phone itself wasn't the revolution. Its real breakthrough was putting the internet in everyone's pocket - constant, portable, always-on. The internet's arrival had unleashed disruptive forces across every corner of the economy and daily life, triggering an enormous wave of investment that swelled into a bubble around the turn of the millennium - and then, spectacularly, burst.
Disruptive innovations tend to follow a pattern - one mapped by research firm Gartner in its hype cycle: a technological breakthrough captures attention. Media coverage inflates expectations beyond what realistically can be delivered. Disappointment follows, then disillusionment sets in. Only gradually, as practical applications emerge and illustrate genuine value, does widespread adoption begin.
The internet bubble carries all the hallmarks of this cycle. From the mid-1990s, tech companies flooded public markets, raising enormous sums - sometimes even without credible business plans. Euphoria about the profit potential of this new technology drove share prices to dizzying heights. These were the "companies of the future" - until the bubble burst. Many investors suffered heavy losses - some were first-time shareholders. Countless tech firms collapsed into insolvency.
Yet after the wreckage, the underlying innovation - digitalisation - not only survived but exceeded even the most optimistic predictions, fundamentally reshaping everyday life. Companies with competitive business models - Amazon, eBay, Google - weathered the storm and only then began their ascent. As so often happens, the technology's short-term impact was overhyped while its long-term consequences were vastly underestimated.
When OpenAI released a new, free version of ChatGPT in late 2022, artificial intelligence captured investor attention almost overnight - and ignited an investment boom. Record spending on data centres, chips and infrastructure has revived uncomfortable memories of the dot-com era, creating fresh uncertainty. Yet investors who stick to certain principles can participate: avoid the hype, never concentrate risk in a single bet, and always assess the innovative merit of individual companies.
"Don't invest at the peak" is sound advice. The trouble is, the different phases of a hype cycle are rarely obvious while they're underway. We only recognise in hindsight when they begin and end. Still, there are warning signs.
One red flag: when interest in a new investment theme becomes so widespread that even media outlets with little interest in finance start breathlessly reporting investment opportunities. Another: when huge amounts of capital flood into a sector and valuations reach absurd levels, simply because companies operate in a fashionable new space.
This makes it essential to base every investment decision on the fundamentals, and look at a company's intrinsic value. The price-earnings ratio (share price divided by earnings per share) offers a useful starting point. If a company's P/E is substantially above sector norms, it needs closer examination. Note, however, that today's AI companies differ from the tech darlings of the past: many established corporations active in artificial intelligence are already generating healthy, growing earnings, which puts their elevated valuations on firmer ground.
Amid the excitement over new technology, a basic principle often gets overlooked: never put all your eggs in one basket. Don't stake everything on a single stock, however golden its future appears.
Reto Stohler, Head of Portfolio Advisory Europe at LGT, advocates a diversified approach with balanced asset allocation: "Within your defined allocation framework, invest across different types of innovative companies at various stages of development." Portfolios should also span sectors - backing firms revolutionising traditional industries like mobility, healthcare and finance through fresh approaches - and geographies, capturing innovation globally.
Thematic investing offers a structured way to access this progress. The approach systematically identifies long-term trends, allowing investors to participate in fundamental shifts across industries.
Megatrends are long-term, profound global changes that reshape the economy, society, technology, the environment, and culture over decades. They have major implications for companies, markets, and human behaviour. Thematic investing can focus on megatrends such as digital transformation and technological progress, climate change, sustainability, geopolitics, demographics, and social and cultural change.
A thematic lens helps to pinpoint companies actively driving these shifts, as well as those positioned to benefit from them.
Innovation isn't confined to wholesale disruption or digital transformation. "Companies must constantly evolve and sharpen their offerings to stay competitive," says Georg Ruzicka, Head of Thematic Investing Europe at LGT. But how can investors judge whether the companies in their portfolios are innovative enough to maintain their competitive edge?
Several indicators offer clues: investment levels relative to revenue, research and development spending, and the proportion of sales coming from recently launched products. Depending on the sector, patent activity can also signal strong innovation.
Warning signs matter too. According to Georg Ruzicka, trouble often begins when previously successful innovators start missing expectations and losing market share. "When the iPhone launched, the then market leader Nokia quickly lost substantial ground. If that happens, you need to closely examine what's going on to understand what's driving the decline," he says. "Looking back, it marked the beginning of the end of Nokia's dominance over mobile devices."
Innovation never stops: each breakthrough is followed by the next. The same holds for investors. Just as companies must continually reinvent themselves, investors cannot afford to ignore innovation.
