One of the most useful mental models we’ve come across as investors comes from Carlota Perez’s book Technological Revolutions and Financial Capital. In her book, Perez explains that most new revolutionary technologies enter the world in two phases. The first, an installation phase is when the new technology is introduced to the world and the hype builds. Capital flows to this technology, excitement about possible use cases grow, eventually forming a financial bubble. Inevitably, that bubble bursts.
After the bubble bursts, a deployment phase follows. And in the deployment phase we see less hype and more real world applications. The classic example is the internet, marked by an installation phase started with Netscape’s IPO in 1995 to the bursting of the bubble in late-2000 and early-2001. After a few tough years for internet-companies, the deployment phase really kicked off with Google’s 2004 stock market listing and from there the truly great technology companies became the megacap stocks that we know today: Amazon, Alphabet, Netflix etc.
This article takes a closer look at the internet bubble and draws parallels to the Artificial Intelligence hype of today. From this article and Perez’s work, a few of our takeaways for when we think about investing in disruptive technology:
- There is no rush. It is easy to get caught up in the hype and feel like you’re missing out in the frenzied installation phase. But remind yourself that the real money is made waiting for the long-term winners to emerge, and that often comes after a crash.
- If you are investing in the early days of a new disruptive technology, it can be hard to separate the real use cases from the hype. Manage your position size and your investment time horizons accordingly.
- Not every new technology is a revolutionary new technology. We’ve seen the internet analogy rolled out for Crypto, NFTs, Web3, Virtual Reality, the Metaverse, and now Artificial Intelligence. When you’re living through it, it is hard to separate a new technology from a revolutionary technological.
This is an excerpt from our Thought Starters email. Once a week we send you 5 interesting articles that have caught our attention, to get you thinking. No spam, we guarantee.