Go long to reap the rewards of tech stocks

Energetic 20-somethings turning into billionaires in a few months. Unicorns rising from nowhere to nine-figure valuations in the space of a few funding rounds. Venture capitalists making a thousand per cent or more on their investments before they have even had time to write a report for their shareholders. Technology moves so fast that we have become used to the idea that the internet operates at lightning speed, making and breaking fortunes in the blink of an eye.

Except that is not really true. In fact, in technology, as in so many other areas of life, it is the long game that often pays off. There are companies that take a couple of decades to work out exactly what their business is and how they can make money. We saw evidence of that this week from Ocado, but there are plenty of other examples, from Netflix to Microsoft. Investors need to learn to be patient – or miss out on some great opportunities.

It has been a great week for Ocado investors. The online grocery company announced a tie-up with the American supermarket giant Kroger.

With 2,800 shops across the US, it is the third largest grocer in the world. It was not quite like doing a deal with Walmart, but it was the next best thing. Ocado’s shares jumped by 45pc as the news broke, adding £1.6bn to its market value. It is not in the FTSE 100 yet, but it almost certainly will be soon.

But Ocado is not an overnight success. The business was founded in 2000 in the middle of the first dotcom boom. It has chewed up money in investment, seen its shares ride a rollercoaster, and there were plenty of times when people thought it might collapse. It regularly featured on the list of the most shorted shares on the London market, as hedge funds bet big on it running into more trouble. It is doing brilliantly now, but it didn’t look that way for a very long time.

An exception? Not really. In fact, a lot of tech companies take many years to find their feet. If you ever need a trick question for a quiz night, try asking people when Netflix was founded. Most people think it was around 2010 or 2011 because they had never heard of it before then.

Actually, Netflix has been around since 1997. It was just that it didn’t make much impact until it started creating its own shows. Now it is worth $140bn (£104bn) and within a whisker of overtaking Disney as the largest entertainment business in the world. Rather like Ocado, it took Netflix a long time to work out what customers really wanted and how it could deliver it. Likewise, Spotify had to play around with its model before working out charging for ad-free streaming was the right formula.

There are other companies that have come back from what at times seemed like terminal decline. A few years ago, lots of experts were writing off Microsoft as a tired relic of the desktop era, with little presence on the web and nowhere in mobile. Now it is soaring again, with its shares up by 40pc in the last year and predictions it might be the first company to hit a $1 trillion market value. Something similar happened to Apple. It was going nowhere fast before Steve Jobs rejoined the company in 1997 and launched the ipod.

There is a lesson in all that, and an important one. We think of technology as a super-fast industry where companies arise overnight. VCS and investors are always looking for a next unicorn that will make an instant fortune. Bigger companies are always looking over their shoulder for the next start-up that will disrupt their industry. Founders expect to be able to cash out with a few million only months after starting.

There are examples of that. Facebook and Google took off like a rocket, and never really looked back. Uber and Airbnb have seen swift rises. But it often takes a couple of decades or more until a company genuinely establishes itself. And there will frequently be setbacks along the way.

Technology, much like any other industry, can be very slow and companies can take a long time to prove themselves. Investors should take that on board and stop expecting instant returns. If they are patient enough to wait around for a couple of decades, they will do a lot better – and if they aren’t, they will miss out on some big winners.

‘Ocado was no overnight success and regularly featured on most-shorted shares list’