Use value investing principles to prioritize technology innovation investments

Value investing is a financial investment philosophy that focuses on stocks that trade below their intrinsic or book value. The drivers of investment in technological innovation are not always related to financial returns. When related, technology investing is similar to financial investing in that both involve making investment decisions on an asset, such as a stock or technology, and seeking a financial return. However, the two are not exactly the same.

The basic concept behind value investing is simple: If you know the intrinsic value of something, you can save a lot of money by buying it when it's on sale. Today, digital technologies such as artificial intelligence [AI], cloud computing, and augmented or virtual reality [AR/VR] have become indispensable assets, helping organizations increase productivity and build better products. Technological innovation leaders can apply value investing principles to reduce investment risks and improve investment returns.

Develop your own technology investment strategy—and distance yourself from Mr. Market

"Mr. Market" is a type of emotional investor hypothesized by economist Graham. Mr. Market is driven by emotions such as panic, enthusiasm, and apathy, and can oscillate between pessimism and optimism, driven by emotions such as fear and greed. This image of a hypothetical investor is intended to illustrate why the market as a whole exhibits these characteristics.

Unfortunately, the Mr. Market phenomenon is also common in technology innovation investments. When investments in technological innovation are influenced by Mr. Market, they are more likely to fail because decisions are not based on rational considerations. Like the stock market, Mr. Market pushes technology innovation leaders to pursue overhyped innovations and thereby ignore innovations with long-term value. This coincides with Gartner’s Hype Cycle Research Report. The Hype Cycle Report shows that most innovations (technologies, services, and disciplines) advance through overhyped enthusiasm, followed by stages of disillusionment, mainstream adoption, and mainstream productivity.

Invest in the technology that’s best for your organization – stay within your circle of competence

Circle of competency is a value investing concept that refers to an investor’s understanding and knowledge of a specific industry, business, or investment. Essentially an area of ​​expertise in which investors have deep knowledge. Investors gain a deep understanding of the business model, competitive landscape, key drivers of success, and the risks and opportunities associated with the investment.

As far as technology innovation investment is concerned, the circle of competence refers to: although technology is constantly developing and changing, investors still have a deep understanding of it. In addition, technology innovation leaders must be able to determine whether certain technologies can help support or grow the business and whether they are critical to success. While technology innovation leaders often invest in technology to solve business problems or stay competitive, the reality is that not all technologies are suitable for all organizations.

Ensure safety margin

Value investors have certain expectations about financial risks. Safety margin is the buffer or buffer space that investors have in their investment decisions to ensure that the final loss falls within acceptable limits. Essentially, if an investment has a high margin of safety, it means its market price is well below its intrinsic value. A high safety margin helps protect against Mr. Market's sentiment.

Not all investments in technological innovation are immediately successful. Some will encounter "turmoil," while others may fail. Using a safety margin approach means choosing technologies that have a high "intrinsic value" compared to expected investment costs.

Commitment to developing a long-term investment strategy

Short-term investment requires facing a large amount of uncertainty, because in the short term, stock prices will be severely affected by profit fluctuations. These small fluctuations caused by the Mr. Market phenomenon correct themselves over time and do not affect the value of the company in the long run. In terms of value investing, long-term investment performs better than short-term investment, with higher stability and better overall results.

When it comes to investing in technological innovation, short-term results are attractive in certain scenarios. However, they do not overcome the risk of losing more money due to the sunk costs of technology that may become obsolete. What's more, this strategy doesn't necessarily outperform opportunities with higher ROI over the long term.

Evaluating Use Cases for Value Investing Principles – Limitations of Value Investing Strategies

Despite its track record of outstanding performance, value investing is not a panacea and has its own limitations. Even Buffett has made some regrettable mistakes by following the principles of value investing. He missed out on the phenomenal success of Amazon and Google, investing in Apple only after it became a major player. Value investing is a risk-averse, relatively conservative strategy. This strategy may not work well for investments in emerging technologies.