China's STAR: A new gold mine for veteran investors

Why high-tech generates big returns

As these three attributes are found in almost every sector of the technology industry, successful tech companies usually generate stupendous returns for their investors, while the failed ones hurt them severely.

The average return, on the other hand, can be plentiful for prudent investors who pick their investment targets carefully and spread their risk among a group of carefully selected investment targets. A well-chosen investment portfolio can reduce the huge volatility that can follow heavy investments in the technology industry.

With these features, investing in the technology industry becomes a very challenging task, fit only for the most experienced investors. This explains why the STAR Market only accepts institutional investors and retail investors with adequate experience and capital.

While equity investments via the STAR Market could be very challenging, good technology companies will likely produce handsome returns for their investors. Tencent is a very good example. Since its listing in 2004 in Hong Kong, its stock price has risen by around 500 times!

There are at least two critical determinants behind the potential high returns that can be reaped from China's successful technology companies.

The first determinant is the huge market China has. Silicon Valley is a successful story not only because it is a technology center. It is successful because its location is in the United States, which had the world's single largest market back in the 1980s and 1990s.

A super large market means any investment, however costly, can bring adequate returns once the technology is successfully developed and employed. If the first version of Google's search engine was written in a minority language and used in a small country, there probably would not have been any "Google story" to tell.

Similarly, if the first version of Tencent's QQ chat software was not written in Chinese and used in a billion-plus China (where there are around 900 million netizens now), Tencent would not probably have been that successful as an investment target.

The second determinant comes from the economic phenomenon called "the late-comer's advantage".

Most traditional industries like aviation and home appliances can be classified as "progressive development industries". This means, these industries gradually invent new products; and each generation of product is built upon the foundation of the previous generation, and is only slightly better.

However, many technology industries do not work like this. New generations of technology like 5G, AI (artificial intelligence) and online shopping are completely new inventions, compared with previous technologies. Many new technologies are not improvements of previous technologies.

On the other hand, widespread use of an old technology, as well as the cost of replacing it, can be an obstacle to the employment of a new technology. Therefore, a late-comer, which can be a developing country or a new entrant to an industry, can have its own advantage.

Nokia enjoyed an edge during the 2G period but that did not rescue it in the vastly different 3G era, and Apple went on to beat Nokia without any foundation to start with.