Most serious investors are already familiar with the time value of money. A thousand dollars next year is worth less than a thousand dollars this year. The discount factor of the future money is the interest rate you could get on a very safe investment (historically taken to be US treasury bonds). I want to broaden this idea to include the time value of technology and how this affects your investments.
Window of Opportunity
Imagine if you had a great new idea on how to make floppy disks better/cheaper/faster. Would you be able to turn this idea into money? If you had the idea in 1960 it would be worth close to nothing because people didn’t have personal computers and the big mainframes at the time didn’t use floppies. No one could foresee the explosive rise of personal computer that would occur in the 1980’s. Similarly your great new floppy disk patent would be worth very little in 2011 because the world has moved on to optical or RAM technologies. Your floppy disk patent was really only of significant value between about 1985-1995, the peak years of use for floppies. Technology has a window of opportunity; neither earlier nor later will work.
Aging Technology
Different stocks have different sensitivities to the time-value of their technologies. Generally commodity stocks such as oil have only a weak correlation to technological change. Yes, new methods of extracting oil will affect them. Similarly new fuel-saving hybrid cars, for example, can make some small changes to the bottom line of oil companies, but not much. Similarly platinum (actually a by-product of copper and nickel mining) production does not change a lot year to year, however as an investor you still need to be aware of how platinum is used. If cars or coal-burning power plants need to conform to more restrictive environmental laws then the value of platinum could go up, but if technology makes palladium a more effective substitute then the value of platinum can drop.
Biotech Stocks - A case study
Other stocks can be extremely sensitive to technology changes and have only a narrow time slot when they can make money. A prime example is the behavior of drug and biotech stocks. As an investor seeking to value such a company you need to look at their “pipeline”. That is to say what drugs are they working on and how valuable are these? What patents does a certain drug company have and how soon will they expire? What do competing companies have in their pipeline that could endanger the profits of the drug or biotech company that I own?
Future Shock
In general technology is changing more quickly with each passing year. This is one of the central ideas of the 70’s classic “Future Shock”, and it has been proven repeatedly with each decade since the book was published. This has the effect that technology-sensitive companies have a continually shrinking window over which they can recoup investment and make a profit. The companies who can recognize the time-value of technology will be the ones to win in the marketplace, and the investors who pay attention to this concept will be the ones to profit from these companies.
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