The Six Questions that Can Make You Rich (Part Three)

In May, McKinsey Global Institute released its latest report,Disruptive Technologies: Advances that will transform life, business, and the global economy. The highly prestigious research and consulting firm devised a list of 12 technologies that could have a potential economic impact of $14 trillion to $33 trillion a year by 2025.

These 12 technologies (ranked by economic impact) are mobile internet, the automation of knowledge work, the "internet", cloud technology, robot automation, autonomous vehicles, next-generation genomics, energy storage, 3D printing, advanced materials (like graphene), advanced oil and gas discovery, and renewable energy.

The report provides a few staggering conclusions about how the economic impact of the first five listed could reach roughly $30 trillion a year by 2025.

Of course, one of the things this report fails to answer, unfortunately, is how we know these are truly disruptive innovations. What are the commonalities... what are the themes... and most of all, how can investors make a lot of money focusing on these tech breakthroughs?

For these reasons, we devised Six Questions that Can Make You Rich when investing in technology. By answering "yes" to all six questions, you can dramatically increase the probability of a successful technology investment and return on your shares.

All five listed innovations increase the global flow and scale of goods and trade, and these innovations provide a massive boost to the flow of information, capital, and knowledge.

Our third question that we will outline today is the most important technical consideration.

"Does this innovation provide more bang for your buck against rival technologies?"

Cost Effectiveness Is Critical To Scale and Speed

Radical technological innovations don't reach a level of universal adoption until they are considered cost-effective to consumers. Do they save us time, increase our productivity and improve our standard of living?

Naturally, individuals are willing to pay more for a product or service if it provides a great level of convenience. This is why billions of people around the world will pay up to $100 per month for a cell phone that provides access to email, the internet, games, and other interactive mechanisms rather than just pay $19.95 per month for a home phone.

Over time, technological innovation and greater network development enabled companies to expand mobile networks, drastically reduce costs, and make it possible for companies to reduce the associated costs of these innovations.

Now, one of my favorite disruptive technologies, and one that is on McKinsey's list is 3D printing. Although 3D printing can increase both the speed of trade and information, it's highly cost ineffective. Right now.

3D printing, as it begins to experience greater reductions in production costs, will slowly become an essential part of business and consumer lifestyles, just like the laser printer. The ability to create needed products on demand in medicine alone has shown the full potential of this technology.

Overtime we will see 3D printing reduce the need for individuals to drive down the street to a store or go online to wait for a product to be shipped to them. Everyday items like running shoes can be customized by a 3D printer. Soon it will become an affordable consumer product.

Learning the Hard Way

Measuring bang for your buck is a critical lesson that many investors need to learn before understanding how cost-effective a technology is when it comes to an individual's time, wallet, and utility. Perhaps a lesson in cost-effectiveness should be shared with our political leaders as they desperately try to make next-generation alternative energy production more cost effective, but fail to allow the free market to encourage continued innovation.

A few years ago, President Obama was sitting in the White House going over the financials and job reports of green energy projects that he had green lighted, but ultimately failed to create the millions of green jobs that he had promised in stump speeches all across America.

"Where are the jobs?" he asked.

After spending billions and billions of dollars on alternative projects, they failed to provide as much bang for the buck as traditional fossil fuel projects around the country, and ultimately have failed because the input costs and consumer behavior make them less attractive alternatives.

Green technologies, although they have the potential to become successful parts of our energy strategy, are not cost-effective now. And government intervention in the markets is reducing innovation in the sector that would lead to companies reaching major breakthroughs to increase that bang for the buck. The cost of producing a kilowatt of electricity from wind in comparison to coal and natural gas is much higher.

And while that isn't politically convenient, many people still seem to believe they can reverse the second law of thermodynamics, click their heels and hope wind and solar will become more cost-effective positions.

In energy we have to look to key metrics to understand just how cost effective a new technology like solar or wind can be.The more important metric is the cost per kilowatt-hour and the cost of investment per kilowatt-hour.

Right now, solar cells are not at parity in cost with natural gas and other fossil fuels. And until the cost of solar cells comes down, it will not reach any level of wide-scale adoption by Americans or other customers around the world who are looking to lower their energy costs.

More Bang for Your Buck Is a Major Technology Trend

We can go down the line of virtually every major technological innovation and see right away how the new technology led to greater return, a higher standard of living, and greater convenience for customers and businesses all over the world.

  • Globally the steam engine gave way to aviation. It's still cheaper to fly to Australia than it is to take a boat... and it will save you about three weeks.
  • The telephone gave way to the mobile industry, with more access, improved functionality and the need to never have to "wait by the phone" in your house.
  • The personal computer is slowly giving way to mobile technology... perhaps the biggest disruptive trend in the history of business and consumer behavior.
  • The postal service gave way to America Online and ultimately the email providers we use today. This drastically reduced costs, improved communications, and was far more cost effective in terms of time and delivery.
  • Digital photography has completely displaced the Xerox and Polaroid's of the world, as customization, reduced costs, and the ability to take 500 photos, print, and publish them instantly has all but destroyed the 24-hour photo booths of the world.
  • Ultrasound technology has disrupted X-ray imaging.
  • Internet education and the related technologies are displacing brick-and-mortar higher education, with more convenience, reduced costs, and similar quality of education.

There are three technical questions that every investor should ask when it comes to a radical technology innovation. Does it increase speed of trade, flow of information, and does it provide more bang for your buck?

But there are three other questions that we must ask to really identify the full potential, and practicality of our investments. And that will be the subject of next week's exploration, followed by six companies poised to break out with disruptive technologies, and the six technologies from McKinsey's list that offer the most upside for investors.

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