Investment and technology: A marriage made in heaven?

April 2, 2019

Its relationship status would say ‘it’s complicated’, says Nathan Nicholson, investment analyst at Vertem

Technology is at the heart of some of the most disruptive and highly coveted companies in the world, and as a result plays a huge role in the investment industry. Technological change, disruption and development is either affecting the companies we invest in, how we invest, and our own business operations at any one time. There is no doubt that technology has brought our industry on leaps and bounds, however, on many occasions, it has been a case of two steps forward, one step back.

Black Monday was one of the first afflictions with technology. October 19, 1987 saw global markets crash, the FTSE recorded its largest one day fall in history and the Dow Jones shed over 20 per cent in a single trading session. The catalyst was more of a perfect storm, rather than one single event, but what made the sell-off so severe was computer-programmed trades. They exacerbated the selling because of pre-programmed sell orders, which were ironically meant to cut losses. These capabilities were so new, traders were oblivious to the potential damage they could cause in such an event. As a result, ‘circuit-breakers’ were brought in to give markets a breather in times of panic, but ultimately it was a harsh lesson to learn.

The dot-com crash followed. The bubble began in the mid-nineties, eventually popping in the early noughties. It was built on speculation and delirium that the internet could do no wrong. Investors couldn’t get their cash into online firms fast enough, the mere mention of a ‘www.’ turned their eyes green with rolling dollar signs. During the hysteria, basic investment principles were overlooked and eventually the bubble burst. Many tech firms went bust shortly after their companies went public. However, those with solid business plans and not just a domain name went on to triumph – Amazon being a prime example. The dot-com crash well and truly marked the end of our honeymoon period with the internet.

More recently, we had the most devastating financial crisis since the great depression. Technological globalisation was one of the main reasons it was a true global financial crisis, allowing the butterfly effect to be more profound than ever before. Technology had made investments so easily accessible and intertwined across the globe, turning the global financial system into one big line of dominoes waiting to go.

As demonstrated, technology has always been a double-edged sword to the investment world. As new technology comes to the table, it often means something has to give. Take the high street, for example, where retailers are fighting an online battle. It’s great having next day delivery, cheaper fashion, and free returns, but this has consequently led to the loss of man,y big-name stores over the last few years. Retailers must stay ahead of the curve and strive to innovate if they are going to survive in this online world.

Nokia, Blackberry and Motorola were all top selling phone brands not so long ago. They arguably stood complacent for a period of time and now you’d be hard pushed to find someone carrying one. Technological advancement and change are only gathering pace. So many industries have been shaped by new technology recently. Look at what Uber has done to taxis. Challenger banks without physical branches. Netflix is also one of the biggest disruptors of late. Not only did it apply the final nail to Blockbuster’s coffin, it changed viewing habits so much it impacted film production, TV broadcasters, cinema groups and adjoining retail suffered from lower footfall.

Technological improvements are vast, and as a consequence the financial industry is now unrecognisable from only a few decades ago. The increased transparency is one benefit, people once spoke to a broker they knew very little about to buy shares in a company they knew less about, receiving sporadic postal updates. Now you can price compare brokers like you would insurance, track share prices on your phone and read through company reports instantly available online.

Where are we today? Well, last year the techheavy Nasdaq’s two-year rally come to a dramatic halt, as it dropped nearly 25 per cent in the final few months of 2018. Due to the large amount of tech constituents it plays proxy to the sector. The run saw Amazon and Apple become the first companies to reach $1trn market valuation, although the fall highlighted the volatility of technology and the relatively high valuations these firms sit at. Throughout 2018 we also witnessed Bitcoin’s fall from its dizzy heights, collapsing from $20,000 to approximately $4000 at present. Then there were the numerous tech PR disasters – Mark Zuckerberg visiting court after the Cambridge Analytica scandal and Tesla CEO Elon Musk’s outlandish comments have got him, and his company, in hot water on numerous occasions.

It is evident that technology remains volatile in investment. It is a gift and a curse at times and continues to allure investors with speculation unlike traditional sectors. Investing in tech should be the same as investing in any other sector. You wouldn’t invest in a company you didn’t understand the operations of, and the same principle should apply for tech companies. Although we have seen huge success stories in tech with the likes of Amazon, Apple and Microsoft, there are hundreds more that have barely made an impression. After all, this is a sector that has seen Kylie Jenner wipe over $1bn dollars from Snapchat’s market value in a day after tweeting she doesn’t use the app anymore (the most millennial attack of all time!).

There is room in every sector for technology alongside more traditional methods. However, businesses need to adopt a more proactive approach, rather than being reactive to change. Looking ahead, there will be more pain for retailers, as the teething process of technology continues. A challenge further on the horizon is managing the rise of Robotic Automated Processes (RPA), better known as ‘bots’ – which could do to office space what online retail did to high streets. Whether you view this as a positive or negative for business depends which side you’re sat on – luckily for investors you can sit on both.


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