Technology is changing rapidly – should your investments be?

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“Can Elon Musk save the internet?”

Source: Shutterstock

I asked this question a few weeks ago after the island nation of Tonga lost all internet service due to a volcanic explosion.

Although it was a bit of an ironic question, Musk replied a few days later :

A screenshot of a tweet from Elon Musk asking if Tonga could let him know if SpaceX should send to Starlink terminals.

Source: Twitter.com

According to Tonga’s Attorney General, SpaceX now “has a team in Fiji establishing a station that would connect Tonga through its Starlink satellite internet service”.

Details of his progress have yet to be shared. But the overall objective would be to link Tonga to Starlink’s “constellation” of about 2,000 satellites that currently orbit the Earth. This would allow Tonga to connect to the internet without relying on vulnerable undersea marine cables which currently account for 99% of global internet traffic.

As a venture capitalist, I find this story amazing:

A small island in the middle of the Pacific Ocean is cut off from the internet due to the biggest volcanic eruption of the 21st century…

Then one of the richest men in the world, who runs some of the most cutting-edge companies, steps in to work to reconnect the island to the global communications hub…

All in less than a month.

It’s a series of events that would only seem plausible in a futuristic sci-fi novel…

Except it’s happening today, in real life.

This is the story that many investors miss today:

Our world is changing and transforming at an ever faster pace than ever before.

On the one hand, it is extremely exciting.

New technologies are developing faster than most of us realize. And this brings about significant changes in our lives.

Everything from the way we consume information to the way we work has changed dramatically over the past two years.

On the other hand, these changes also cause a lot of conflict…

Growing pains due to accelerated change

These changes are causing conflict in the literal sense, as we see political and social clashes on the rise.

But this is also true in a personal sense, as individuals have less certainty about the direction of their future.

This uncertainty has caused many investors to abandon traditional investment strategies and lose sight of long-term business building strategies. Instead, emotions take over, which in turn fuels short-term investment behavior.

During the ongoing pandemic, investors are holding stock market investments for a record time: just five and a half months.

A graph showing the average holding periods of stocks over the years from 1930 to the present.

Holding public stocks for such a short period can certainly be profitable when executing specific trading strategies…but this only applies to a very small sector of the investing community. (Think hedge funds with large capital, large analyst teams and proprietary trading tools.)

Cathie Wood’s answer to short-term horizons

This tendency to buy and sell stocks quickly has recently been evidenced by the high volatility in Cathie Wood’s stock. ARK Innovation ETF (NYSEARC:ARKK).

Excerpt from Fortune magazine:

“In the three weeks since the start of 2022, en route to a sharp overall decline, ARKK price has on average risen an astonishing 6.5% between its high and low for the day. On Jan. 24, for example, it oscillated 13.2% and over five days it covered 8% or more from bottom to top.In contrast, Bitcoin varied by a daily median of 5.1%. Consequently, ARKK was a quarter more volatile than the most volatile game in the investment world.

Although many criticize Wood’s strategy and ARKK’s actual fee structure, the fund itself has a fairly clear objective: “seek long-term growth” by targeting “disruptive innovation”.

Despite the fund’s long-term strategy, investors withdrew $352 million in one day in mid-January, proving the market’s reluctance to stick to long-term investments.

In response, Cathie Wood announced a new product: The ARK Venture Fund.

As reported by Bloomberg:

“The ARK Venture Capital Fund will follow the same “disruptive innovation” investment theme as the well-known ARK Innovation ETF (ticker ARKK), but target “illiquid securities and securities for which no secondary market is readily available, including those of private companies”, the deposit said.”

In addition…

“The fund is structured with lock-in provisions that will help the renowned Wall Street manager maintain more control over investors’ cash flows entering and exiting the strategy.”

The blocking provisions will only allow investors to withdraw money on a quarterly basis, and this amount will be limited based on total fund redemption requests.

Allow me to translate all of this because the irony here is unbelievable…

Cathie Wood basically tried to replicate a venture capital type investment through her ETF ARKK. Although it targets public companies, the strategy of targeting disruptive technologies is akin to how venture capitalists seek out investment opportunities.

However, the lackluster behavior of public market investors has hammered the ARKK ETF (currently down more than 50% from its highs).

These public market investors were expecting huge gains in a short period of time. In times of volatility, it makes sense that they exit quickly.

So, in response, Wood is launching a product that limits investors’ ability to buy and sell the investment vehicle she and her team manage. The intention is to prevent investors from making rash decisions. This forces them to hold their ground through the ups and downs.

The assumption is that in the long run, everything will be fine.

The recent poor performance of ETF ARKK has put Cathie Wood in the spotlight.

However, the erratic behavior of investors is what really should be the focus of the conversation.

Venture capitalists seek long-term profits

As a venture capitalist, this should be a stark example of how the market works…

Investors looking for outsized returns must pursue strategies that the crowd eschews.

Instead of patiently investing their capital for the long term in innovative, well-run companies, the crowd generally pursues emotionally-driven investment strategies.

Innovators like Elon Musk have opened the door to whole new ways of thinking.

Incredible transformations happening all over the world.

It’s an exciting time to be in!

But the best and most profitable investments take time to develop.

Like Musk’s Tesla (NASDAQ:TSLA), founded in 2003. The company’s first car, the Tesla Roadster, only became available five years later in 2008. When Tesla entered the public market in 2010 (seven years after its inception) , the stock opened at $17 a share with a valuation of $226 million and the promise of an affordable electric vehicle…

Fast forward to today, and Tesla boasts a market capitalization of $961 billion. Elon Musk is the richest man in the world. But the 19 years since its founding have not been a steady progression…

There were production delays for the affordable Model S3…Tesla was having trouble meeting production targets…

In fact, Tesla only had its first profitable year in 2020… 17 years after its inception.

What I mean is that truly profitable breakthrough businesses take time to grow. The biggest gains don’t happen overnight (at least not very often).

The most successful investors act with patience, not short-term emotion.

Do your research; trust your instincts.

Then you can trust your wallet and sleep soundly. No need to worry about short-term noise.

As of the date of publication, Cody Shirk had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investment space. To make sure you never miss Venture Capital Digest, Click here to subscribe.

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