General Purpose Technologies, or GPTs, are technologies that drastically change the framework of the economy from the ground up. GPTs are known for having far reaching impacts that change everything from the business side of life, including supply chains and business compositions, to even personal and social aspects of life including work hours, family constraints, and even gender norms.
Investing in GPTs can be a highly research-intensive investment that aims to find technologies that will one day be a part of the foundation of the economy, but are currently somewhere in the early stages of its development. Examples of technologies that have had this kind of impact in the economy include steam engines, the discovery of electricity, and computers and semiconductors.
These technologies, and investments, are getting a lot of attention right now with the success of ARK Invest. ARK Invest is a global asset manager that specializes in investing in disruptive technologies. Cathie Wood founded ARK Invest in 2014 and has since emerged as a guru of sorts for stock picking after outperforming other ETF makers to earn the ETF.com award for Most Innovative ETF Issuer in 2019.
There are 5 actively managed ARK ETFs that follow 4 different technologies; including in Genomics (ARKG), next-generation internet companies (ARKW), autonomous driving and robotics (ARKQ) , as well as in Fintech companies (ARKF). The fifth is the ARK Innovation ETF (ARKK), which rather than investing in a single technology, invests across the board in ARK's favorite disrupters.
Because GPT investments are a speculative bet on a technology, GPT investments are a long-term game that is mostly found in Growth Investing strategies. This is because investors in GPTs aim to beat the market to the technology. However, as the technology itself becomes more widely adopted, the investment shifts into a grey area between Value and Growth investing.
At this time, the technology becomes open to a lot more speculation and oftentimes gets accused of becoming a bubble. This stage can be pretty volatile for investors as sometimes, the technology ends up being less foundational to the economy than expected, or in other cases, the value of the technology becomes obvious and everyone jumps in. This can mark a shift to an economy’s productivity curve, increasing capacity.
So what are GPTs exactly? Well, like anything that is defined by academics, it’s pretty debatable (especially at a high level). However, it is generally agreed that GPTs are pervasive technologies that have the inherent ability to be technically improved and have complementary innovations.
A great example of this is the steam engine, which became a foundational technology during the Industrial Revolution. The steam engine was a pervasive technology because it was adopted in pretty much every sector of the market. The steam engine was used to replace horse and man-power in factories to speed up production times while reducing their costs, as well as to propel ships across the water to speed up deliveries and create a new, wider-reaching scope for businesses as the transportation of people and goods drastically changed. The steam engine was continuously innovated to more efficiently capture the energy that it produced and was easily innovated upon to fit the purposes of many businesses.
As the steam engine was being implemented across the manufacturing world, companies began to realize that they needed less strength from individual workers to run plants. This caused employers to begin hiring more and more children, as to avoid the higher wage demands of adults. However, as time progressed, the cruelty of child labor came to the forefront and opened the door to modern child labor laws, widespread pursuit of education, as well as minimum wage laws to ensure living standards.
How do you identify GPTs?
Identifying GPTs is a difficult task, but can be found by diving deep into your favorite sectors and industries, monitoring acquisitions, and identifying the technologies that companies and/or analysts are touting as the future. GPTs are often kept secret by to prevent ideas from being prematurely stolen by a competitor. This makes it difficult to know if a technology is still just a sci-fi dream, or if the conditions have been met for AI and Robotics, for example, to usher in a radically new dining, shopping, working, and living experiences.
With that said, GPTs really can only be found by keeping an open-yet-skeptical mind while researching your next move. You must be open to the fact that the world will change, yet skeptical towards any individual technology that claims to be that agent of change. There are thousands of technologies that get promoted as the future, but very few ever reach the level of impact needed to become true GPTs. This doesn’t mean the technology had no impact nor that it would have been a bad investment, but it does mean that the technology didn’t insert itself into the foundation of the economy and will eventually be rendered obsolete.
But how do you invest in a technology…?
So obviously, one can invest in a technology by investing in the companies that make it. Any company doing business in the GPT should gain from the technology’s demand growth, however this will not be distributed equally.
The larger the company is leading into a decision to invest in developing the GPT, the smaller the piece of the pie the GPT occupies. This makes your ROI lower in those companies, at least initially, than when compared to a small company whose only line of business is in the GPT.
When investing in GPTs, you’ll want to balance your investments in small and large companies to capture the growth of the technology, rather than of individual stocks. This is because the small companies that become tomorrow’s S&P 500 carry a lot of risk because only a handful of them ever end up lasting long-term. The larger companies are important hedges because as the technology becomes more and more cost-effective, they maintain the ability to increase their investments into the GPT even while acquiring some of their promising competitors.
With this balance in mind, investing in GPTs can be made infinitely simpler by exploring related mutual or Exchange Traded Funds (ETFs) like those from ARK or elsewhere. These funds are managed by highly trained analysts who handle the balance between the high ROI small companies and the large companies with a high likelihood of still being a company a decade from now. They also tend to be highly specialized in the technology they are covering, giving them a better base to make investment decisions on an unproven technology than most other people.
While investing in new technologies is risky and difficult, it can result in higher high returns when done right. By scouring the market for GPTs, we can identify future winners easier than if we left the criteria open-ended because these technologies don’t just change the game momentarily, but rather have an inherent ability to be continuously innovated.
