Would You Invest in Tech Stocks? What Exactly is the “Tech” Industry Anyways?
I don’t talk much about investing in equities, and for good reason. I don’t think I should be investing when I am in debt. I contribute to my retirement account and savings account with every dollar I make, but I am not spending much time these days thinking about investments. Personally, I prefer small business and real estate investments, and stock investing requires time and a sophisticated understanding of the industry you invest in. Put simply, you better know your sh*t! I’m OK with not investing, knowing that my debt balances are going down and my savings is growing (slowly of course). Which got me to thinking about tech stocks. Tech stocks are always in the news. Sure, right now it’s Facebook and its inevitable underperformance, but before that it was Groupon, and LinkedIn, and Microsoft and Baidu and Zynga and Yahoo! and eBay and Amazon…you get the point. Remember how I lost a lot of money in options? Well, that was a tech stock. I took advantage of that stock’s volatility for two years profitably, but in the end, I got hosed because it wasn’t my investing strategy I was using, but someone else’s. I learned a great lesson about investing (develop your own strategy), but I also became much more wary of the tech industry.
Many great investors specifically stay away from tech stocks. The industry changes rapidly and competition is fierce, including shameless copycats. Users are fickle, servers crash and you’re one animated GIF away from becoming a sad internet joke. That’s an exaggeration but it’s not a grand one either. On the other hand, companies like Youtube and Instagram are companies without many major physical assets but who were nonetheless acquired for $1.65 Billion and $1 Billion, respectively. Think about that. I think it’s important for people from all walks of life to grasp that concept: the amazing thing about the tech industry is the value which its major players put on a product or service that has a large number of users with a strong loyalty record. Instagram is not making money…yet. But it has 30 million users (and growing) who might be willing to sit through an ad the next time they log in to the app. Which brings me to my next point: the world’s largest technology company, Google, and most other web-based or mobile tech companies make their money from advertising. Does this blow your mind? It blows my mind! Here is a product as amazing as Google, one that has infiltrated millions if not billions of people’s lives, it has changed the way our mind processes information, the way we think and it has made me an information and media addict, and it derives the majority of its revenues from advertising! Unlike TV or movies, there are no subscription fees or box-office revenues.They don’t charge for 99% of their products and services. Just ads. Just other companies paying Google to allow them to place ads all over everything and all over our minds. What can we take from all of that? That providing businesses with a service that you can do better than they can (Google is better at getting their ads out to more viewers) can be 1000x more valuable than the products of the business itself! Crazy right? While it’s exciting for Google and other big players, an entire industry dependent on advertising revenue seems extremely volatile and we have seen tech stocks rise and fall sharply since they began dominating NASDAQ in the late 1990s. Companies can fold or fade easily in any industry, but it seems like the sheer volume of tech companies makes it all the more dramatic.
Of course, internet and web-based companies are not the only types of companies that are tech.
Tech Industry Includes All Kinds of Companies
There are software companies (Microsoft), e-commerce companies or e-tailers (Amazon), hardware companies (ASUS), WiFi/connectivity companies, SaaS (Software as a Service like Salesforce) and cloud computing services and so many more that don’t get as much airplay like financial technology (like payment processors), medical technology and building and engineering technology. Lots of these companies have tons of physical assets, are sitting on cold hard cash (last I checked Yahoo! had about $3 billion in cash) and have weathered several economic storms. So there are plenty of companies that could be values for an investor, but they are probably not going to be the hyped-up IPOs.
I love the technology industry and like to stay somewhat informed of the news and trends in this market, but I am not about to buy any more tech stocks. I am not a full-time or active investor at all, and investing in tech stocks without a deep understanding of the company, the management and the next big move the company needs to make is straight GAMBLING. You wouldn’t invest in a shady MLM company when your financial situation is rough, why should you take a similar risk with investing in a tech company you know little about?
One of the hardest things about changing your financial situation (from really crappy to pretty good) is getting the big picture of financial matters. Sometimes, when we are tight on money, we hear anecdotal evidence that could tempt us to take big risks. “Lady Godiva bought Apple stock when it was $92 and now it’s almost $600!” or “Jamie’s brother is buying a ton of foreclosed houses and flipping them for profit!” Anecdotal. Anecdotal. Anecdotal! It’s one instance. What worked for someone else in the past may not neccesarily work for you. I try not to compare myself to others anymore. Consider the same advice in your investing and financial life. So even though I like the technology industry and its services and products and breakneck speed, I don’t have any plans to invest in it. Unless someone has the next Instagram and wants to offer a very small angel investor a 10% stake. I wouldn’t turn that down.
What about you? Do you have preferred industries you invest in? Others you steer clear of? Where have you had your best returns? Secret tip-sharing encouraged.