New technology can drive the market in surprising ways. Although they may come out of nowhere, there's a documented phenomenon that can explain the rise and fall of these kinds of stocks. The Gartner Hype Cycle is a model that more or less shows how emerging tech works within the framework of investing. Let's take a look at what this is and what it means for you.
What is the Gartner Hype Cycle?
The Gartner Hype Cycle is essentially a model that explains what happens when a new technology enchants the popular imagination of investors across the board. Tech can be challenging to invest in because of the emotion and hope that's involved (hope is a powerful drug).
Knowing that these investments go through a particular cycle, however, can also help an investor keep their eyes open. Each stage of the Hype Cycle carries different levels of risk and reward, helping investors to match their investment style and risk appetite to the technology stocks on their watchlist.
What are the phases of the Gartner Hype Cycle?
There are five phases of the Gartner Hype Cycle:
- Innovation trigger: This is where it all starts -- something exciting is invented, a breakthrough happens, and people get interested. Often, there are not even prototypes or usable products yet, and commercial viability is unknown.
- Peak of inflated expectations: Because everyone is hyped, a lot of people may adopt the new tech and generate early buzz with a number of success stories, followed by plenty of failures.
- Trough of disillusionment: As those failures continue and the tech fails to deliver on hearty promises, interest starts to lag. Many tech companies in the field will fail or give up. Surviving companies work to improve the product to satisfy early adopters and maintain some small amount of momentum.
- Slope of enlightenment: As the tech is more widely studied and understood, more instances of how the tech can be used commercially emerge. Companies produce second- and third-generation products as the research and development finds solid footing and direction. More enterprise pilots start.
- Plateau of productivity: Finally, the product enters the mainstream and starts to gain real traction. People and companies understand why and how to use the tech, and the criteria for assessing companies that provide it are more clearly defined. The product starts just to become part of the everyday background noise.
Pitfalls of the Gartner Hype Cycle
There are a few misconceptions about the Gartner Hype Cycle that are important to understand before you attempt to use this model for your investing. Remember, firstly, that it is just a model that only approximates real life. Real life is messy, but models are not, so you could easily watch a technology bounce between parts of the cycle repeatedly before it finally settles.
Also -- and most importantly -- you cannot time the market using the Gartner Hype Cycle. This is not about timing the market or predicting the speed at which a new technology will mature. It's about understanding how the technology will mature, as well as the risk associated with each step of the process.
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Why the Gartner Hype Cycle matters to investors
Tech investors are working with an industry that's always on the move, with a lot of innovations that never make it to the production floor. Understanding where your investment is at any time relative to the Gartner Hype Cycle can give you a better insight into what you should be doing to protect your capital.
For example, if you're interested in first-stage technology that's barely even born, it's not a great idea to dump a lot of money in all at once. Take small positions in many companies in the space and monitor them for progress.
As time goes by, you'll get a better picture of which companies are most likely to succeed. And those companies may succeed dramatically, requiring you to adjust your portfolio or to simply wait to see what happens through the peak.
Conversely, if you're interested in tech investing but don't want to take a big risk with your capital, choosing companies in the final stages of the cycle may be more to your liking. You should already be able to see clear leaders and understand what they're bringing to the table, so a larger investment might not be as risky at that stage.
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