In May 2013, the McKinsey Global Institute published an extremely influential and timely report entitled “Disruptive Technologies: Advances that will transform life, business, and the global economy”. Every equity investor should download and read MGI_Disruptive_technologies_Executive_summary.

This report identifies what McKinsey’s researchers believe are the 12 most economically disruptive technologies over the next ten years. The report is now over three years old but remains timely in our view.

Twelve Emerging Technologies

1. The Mobile Internet 
Increasingly inexpensive and capable mobile computing devices and Internet connectivity

2. Automation of Knowledge Work
Intelligent software systems that can perform knowledge work tasks involving unstructured commands

3. The Internet of Things
Networks of low-cost sensors and actuators for data collection, monitoring, decision making

4. Cloud Technology
Use of computer hardware and software resources delivered over a network or the Internet, often as a service

5. Advanced Robotics
Increasingly capable robots with enhanced senses, dexterity, and artificial intelligence (AI) used to automate and learn new tasks

6. Autonomous Vehicles
Vehicles that can navigate and operate with reduced or no human intervention

7. Next Generation Genomics 
Fast, low-cost gene sequencing, advanced big data analytics, and synthetic biology

8. Energy Storage 
Devices or systems that store energy for later use, including batteries

9. 3D Printing
Manufacturing techniques to create objects by printing layers of material based on digital models

10. Advanced Materials
Materials designed to have superior characteristics (e.g. strength, weight, conductivity)

11. Advanced Oil and Gas Exploration and Recovery
Exploration and recovery techniques that make extraction of unconventional oil and gas economical

12. Renewables
Generation of electricity from renewable sources with reduced harmful climate impact.

SOURCE: McKinsey Global Institute

Arguably there will be others but what these 12 have in common, says the McKinsey report, is “they share four characteristics: high rate of technology change, broad potential scope of impact, large economic value that could be affected, and substantial potential for disruptive economic impact”.

Quantifying the economic effect of these technologies is difficult, but by measuring and valuing the numbers of people affected, outputs and market size, McKinsey believes the aggregate additional economic value of adoption is between $US14 trillion to $US33 trillion per annum by 2025. That in itself is a significant investment opportunity as are the companies that are in the vanguard of economic disruption.

For a potential investor, what is striking about the disruptive technologies is that they now transcend the traditional technology sector and include a large number of industries and sub-industries encompassing healthcare, biotechnology, industrials, materials, telecommunications, media, and energy.

This means that an investment portfolio tilted towards a disruptive technologies theme can be intelligently constructed with a view to return and risk, especially since it can now be diversified in terms of industry and market capitalisation. It also means the investable universe is of a reasonable size and contains companies of sufficient liquidity.

As well, since disruptive technologies and innovation are not driven by macroeconomic variables it could be argued that there is a countercyclical bias to many of these companies. And while their stock prices will, on a daily basis, be affected by equity market levels, their long-term potential will be determined for the most part by the strength of the innovation itself, not the underlying economy.

For an investor to participate in the disruptive technologies phenomenon, one should concentrate on three types of companies and where necessary, identify and generally avoid or exercise caution towards the companies and industries who are or have been disrupted.

The Disruptors

Large Established Companies

The first category is large established companies that have grown by possessing or using disruptive technologies and continue to innovate.

Good examples of successful disruptive firms would be Google, Amazon, Facebook, Tesla, EBay, Alibaba, Gilead Sciences, Illumina, Teva, Schlumberger, and Fanuc. This is but a partial list.

The “disruptees”? IBM, Hewlett Packard, Eastman Kodak, Xerox, Yahoo, Barnes and Noble, Borders Books, the entire department store industry, and the lodging industry to name a few.

The Early Disruptors

The second category is the largest and most interesting (and requires the most work). They are the “early disrupters” – companies that are relatively new to the market having gone public in the last 12-36 months, have a powerful disruptive technology and are growing their top line at a high rate, beginning to generate cash, gaining market share at the expense of larger legacy players, and starting to produce earnings. Some are household names while some are not.

Some good examples are Twitter, Netflix, Linkedin, Pandora Media, Fireye, Splunk, New Relic, Arista Networks, Mobileye, 3D Systems, Box, Hortonworks, Square and Lending Club. We will be profiling some of these in future articles.

Who are they disrupting? Cisco Systems, Oracle, Time Warner Cable, the banking industry, Television networks, big Pharma, recruitment agencies etc. You get the idea.

Neophyte Disruptors

The third category is what I would call “neophyte disrupters” – companies that have not yet come to the market, are still private and receiving venture capital funding. Many are high profile. Some examples would be Uber, Lyft, Dropbox, Cloudera, Airbnb, Palantir, Spotify, Snapchat, Pinterest, Warby Parker, Flipkart, SpaceX, Jawbone, and WeWork to name a few. They all have seemingly promising technologies and products and may be turning the industries in which they operate on their heads, but as yet are unproven as public companies. Some of them have received so much venture capital funding they are referred to as “Unicorns” – a rare beast in the pre IPO world with valuations exceeding 1 billion. I suspect some of them will be coming public soon.

I am not a fan of buying IPOs (Initial Public Offerings), no matter how attractive or interesting the company is. It is truly a “mug’s game” and individual investors and even most institutions don’t stand a chance given that the price is not determined by what the company is worth but rather by the perceived demand for the shares.

Many of these neophyte disrupters will be overhyped by the financial media and the brokers, with the result that the share price will have a huge run on day one. Some will be up 25-50% on the opening bell. That is NOT the time to buy them. Let them become “seasoned”, pick up some analyst coverage, and report a quarter (or two) as a public company.

By waiting there is always the risk that you might forego some upside, but in my experience many “hot” IPOs revisit the original offering price (or lower) at a future date. Facebook and Tesla are good examples of over-hyped, overpriced IPOs that declined to attractive levels once public and provided attractive entry points for savvy investors.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.