Why Now May Be the Time to Go Light on the Technology Sector

Many of the most notable technology names have seen dramatic price appreciations in recent years as investors flock toward growth names that can provide significant, tangible upside amid changing global economic trends toward automation and innovation, away from what has traditionally been more stable industries such as manufacturing and commodities.

With so much of the Canadian index weighted toward commodities, housing, and utilities, it can be tempting to wander into the pricey waters of technology companies for a number of reasons.

Diversification can be one justification for why investors may be willing to pay the premiums currently attributed to many technology companies, valuation multiples which simply wouldn’t stand in any other industry.

Another justification might be that it fundamentally makes sense to pay more for a higher-growth company; after all, in the long-run, technology will revolutionize every industry. It makes sense to want to get in early.

The argument against such a thought process is that most of the early money has already been in the game for a long time in the case of most technology companies.

The innovation curve is such that very early investors are likely to be rewarded the most, funded by laggards who tend to invest on the back half of the curve, allowing the venture money to be paid out and recycle in the economy, looking for new innovative things to invest in.

The model is thus built in such a way that getting in too late can be very unprofitable for an investor, and many companies trading on the TSX exhibit signs of being much further along the curve than many think.

Invest Wisely, my friends.