Tech stocks or robots… which works harder?

“Guess what?” I whispered softly. “I’m building a robot”.

Her eyes widened. She could barely contain her excitement. “That’s so cool!” she squealed.

I had arrived home late from work and she had tucked herself into bed, waiting for me to read her bedtime story. Perhaps I had embellished the truth a little, but I owed her a good reason. Plus, how else do you look “cool” in front of a five year old?

Well, instead of a bedtime story, I was met with a barrage of questions:

“What’s his name?”

“Can you build me one to take to Kindergarten?”

“Can he make spaghetti?” (She ate it earlier for dinner).

It was the best way I could describe what I was doing: I was building a fund reporting system that would automate 70 percent of our team’s workload, which sounds quite boring for a kid. It was a sort of like robot, but just more software than hardware.

Thinking about this project though, a thought did cross my mind – isn’t it amazing how new technology can completely change and shape our lives. To think for instance that if I never owned a mobile phone, I would never have dated my wife. It’s crazy but true.

I didn’t have a pen or paper when we first met, but we did exchange phone numbers very easily. If it never happened my daughter wouldn’t exist. I would never have held her as a baby, watched cartoons with her, or even had that crazy conversation about robots. Life wouldn’t be as rich as it is today.

Perhaps though, there are drawbacks. What really worries me is our addiction to smartphones, especially among our kids. Thanks to 4G internet, I have access to social media and streamable music on tap. I can’t remember the last time I read a good novel or looked properly at Lake Zurich on the train to work. Last week when my son – a mischievous toddler – smashed the screen of my iPhone, rendering it inoperable. It was weirdly liberating, relaxing on the train and looking out the window.

Technology has for better or for worse changed me. Often it’s disruptive, presenting a need I never knew I required. What I find fascinating is how it suddenly appears in my life and then proceeds to build up these huge enduring industries out of nowhere.

However, I would prefer to lay out more money investing in these technologies and receive some of the profit, rather than just buying it. But it’s not that easy. When new tech appears, there is usually a plethora of small and mid-sized firms that emerge. Many go bust in the years that follow because they can’t find or sustain a competitive edge in the newly formed industry that develops.

Warren Buffett explained this point so well at the closing speech of the 1999 Allen & Company Sun Valley Conference. He scratched hard against to grain to etch this point into the minds of an auditorium of billionaires and newly made tech CEOs who were now superstars – A year before the Dotcom Bubble burst.

He explained that from the 2,000 US car manufacturers that were mostly active at the dawn of the automobile age, only Detroit’s big three survived as large scale businesses. Similarly, in aviation there were about 300 manufacturers in existence from 1919 to 1939 and only a handful are still around today.

His point was that it is not about assessing how technology will impact society or by how much the industry for it will grow. The focus as an investor should be on the competitive advantage a company has and how durable it will be. Eighteen years on and there are tech companies that appear to fit this description.

For instance, Google is embedded itself into the fabric of our lives, entering even our vocabulary when we say “I’ll Google it!” I can’t think when was the last time I used any other search engine to search the web. Amazon is another interesting company with delivery infrastructure that rivals the best courier services. America’s shopping malls are now at risk of dying out due to the low prices and efficient service that Amazon offers.

Nevertheless, there is a concern I have. Technological advances in a competitive environment have the effect of lowering marginal costs. Music has for instance become almost free with streamable services. Data storage has also become cheaper in the new information age.

My worry is that these well-fortified tech companies will evolve into low margin utilities, just like the electricity industry once did.

Back in the 1950s, the capitalisation of electricity companies grew twice the rate of US GNP. People were installing air conditioning units and buying fridge freezers, which saw a huge rise in electricity consumption. Huge amounts of capital were invested and it was assumed that these wonderful levels of rapid growth would last forever.

Electricity these days is consumed like water. It has become a slow growing industry. Furthermore, the rise of renewable energy and the emergence of smart grids are set to shrink profit margins even further in this industry. Electricity could even one day be free.

Another concern is valuations. There’s talk about an “everything” bubble thanks to a decade of low interest rates and excessive rounds of quantitative easing. Tech appears to be leading the way with a seemingly endless number of new billionaire sprouting out of Silicon Valley.

However, this isn’t the side of the tech industry I’m interested in. I have no interest in premature start-up that are valued with a price-to-possibility. Furthermore, I don’t know how quickly we will move to normal interest rates and I can’t predict when disruptions and painful gyrations in capital markets will occur. Making such predictions is like looking into a crystal ball.

Instead, I’m going to look at how well a business is run and whether I can envisage where it will be by the time my kids go to university. I’m guessing a lot new venture capital startup won’t exist by then, so I’m putting my confidence the long-standard tech stalwarts that have survived and matured from last Dotcom Bubble.

These are the companies that can operate at a lower cost because of the scale of their operations. Their products and services have increased in popularity and adoption. Moreover, their intellectual property gives them an extended lead to keep on innovating, while their brand name continues to strengthen.

These are unlikely to become utility-like sluggards, but instead should deliver robust good quality growth for years to come.

I don’t own a real robot to make life easier. But technology has for better or for worse changed me. Often it’s disruptive, presenting a need I never knew I required. What I find fascinating is how it suddenly appears in my life and then proceeds to build up these huge enduring industries out of nowhere. But how can I invest and make it work hard for me? With the right type of tech companies, my capital might work harder than a robot can possibly ever do for my childrens’ future.