How Disruptors Become Disrupted

How would you like to own a company that changes the world? One with disruptive technology or a completely new way of doing things? The kind of innovation that you couldn’t imagine your life without 10 years from now.

Sound like a good investment?

Earlier this year, CNBC listed the 50 most disruptive companies. The top five included Airbnb, Lift, WeWork, Grab and Uptake Technologies.

You probably already know what Airbnb and Lift do. They’re trying to change the tourism and travel industry. Grab is more or less trying to do the same thing, but with a focus on Singapore.

WeWork is trying to change the way we view workplaces. And Uptake Technologies is looking to disrupt cybersecurity and diagnostics industries.

Unfortunately, you cannot invest in any of these stocks yet. But if they do come to market, I suggest you resist the urge to buy any of them.

They may look like disruptive leaders today. But their future is uncertain.

How innovators lose their top spot

Many leading innovative companies throughout history are no longer industry leaders today.

A great example is Karl Benz. He’s widely regarded as the inventor of the automobile. The company he sold his new invention through, Mercedes-Benz? Now owned by Daimler AG [ETR:DAI].

The Mercedes automobile was first marketed to the rich and famous in 1901. They sold around 34 cars. That might not seem like much. But at the time it was a respectable number.

Mercedes was the disruptor of the horse and carriage. Yet today, Mercedes is playing catch up to nine other auto makers.

The same happened to Motorola Solutions [NYSE:MSI]. In 1983, they brought something to market no one had ever seen before — a mobile phone. Yet today, they don’t even rank among the top 10 smartphone makers.

The question then is, will today’s innovators still be relevant tomorrow?

Invest in what you know

You’ve probably heard it many times before. But I’m going to say it again because it’s important.

Invest in what you know.

Seems simple doesn’t it?

Warren Buffett has said it many times. It’s why he doesn’t invest in tech stocks, among others. It’s not that Buffett doesn’t understand how these businesses make money. Rather, he’s not confident about what could happen within the next 10 years.

Peter Lynch, legendary fund manager, champions the same idea. He tells individual investors to use their specialised knowledge to hone in on potential investments.

For example, if you work in the restaurant industry you might have inside knowledge of what’s ahead for it. Therefore you could better understand investments within that industry.

American Association of Individual Investors (AAII) Journal explained Lynch’s approach as:

Lynch suggests that investors keep alert for possibilities based on their own experiences — for instance, within their own business or trade, or as consumers of products.

The next step is to familiarize yourself thoroughly with the company so that you can form reasonable expectations concerning the future.

Thus, understanding the business is only half of the work. The other half is coming up with a reasonable expectation for the future. That’s why long-term investors like to invest in more predictable firms. Or companies which are largely unaffected by change.

Buffett often uses Wrigley chewing gum as an example.

With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it’s going to be hurt by the internet. That’s the kind of business I like.

But what if you’re an expert in disruptive technologies? Should you then think about investing in industry changing companies?

Why this tech millionaire stays out of technology

Mohnish Pabrai is one of the best investors of his generation. In his youth, Mohnish was an entrepreneur. He started an IT consultancy, TransTech, Inc. at age 26.

Nine years later, he sold the business to Kurt Salmon Associates for US$20 million. It wasn’t until his mid-30s that Mohnish started his own investment fund.

Now you’d think with his experience, Mohnish wouldn’t mind investing in tech. But, in an interview with Steve Forbes, Mohnish said:

My degrees are in computer engineering, I’ve spent a lot of time in the tech industry and I like to say that I don’t invest in tech because I spent time in it. I saw firsthand that the durability of technology motes is many times an oxymoron.

Like Buffett, Mohnish probably understands how most tech companies work. What he has trouble with is predicting the longevity of these companies.

The Harvard Business Review defines disruption as:

‘…a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.

How do these small companies disrupt the Lift’s and Airbnb’s of the world?

The HBR continues:

Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others.

Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price.

Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success.

When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

Does that mean no tech company is safe? Not necessarily.

Take a look at some of the largest innovators in the world. You use their products and services every day. And it would be hard to imagine life without them.

I’m talking about Apple Inc. [NASDAQ:AAPL],, Inc. [NASDAQ:AMZN], Facebook Inc. [NASDAQ:FB], and Alphabet Inc. [NASDAQ:GOOG].

The reason these tech giants are still here today is because they pour billions into game-changing technologies. Thus they keep the young start-ups at bay.

So by all means, don’t stay out of technology stocks. But you should be careful of the latest ‘hot’ disruptive companies that everyone wants to buy.

Who’s to say they won’t be playing catch up in a few years?


Härje Ronngard,
Contributing Editor, Money Morning

PS: There aren’t many investors like tech guru, Sam Volkering. It’s his mission to know everything that’s going on in the tech world. Not only does he meet with company executives and industry leaders, he has a good idea of which technologies matter.

Over the years, Sam’s insights have greatly rewarded his subscribers. In his advisory service, Revolutionary Tech Investor, Sam has active investments up 354%, 406% and 825%.

To find out more, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia