Stocks and Shares

The safe way to invest in tech stocks (Part I of II)

 Tech investing is characterised by hype and hope. We’re constantly on the cusp of fancy ideas that will revolutionise our lives. Sometimes they work – for good or ill. More often they don’t. The small number of winners become huge. The huge numbers of losers cease to be. How do you know which is going to be which? Is there a safe way to invest in tech stocks?

Back in 1966 The Automobile Club of Michigan approached a futurist called Jeane Dixon for some predictions about how cars would function in the year 2016. She predicted cars with retractable wheels that float on a cushion of air, no more petrol / gasoline for fuel, and a radar-like device to “guard against cars being involved in accidents”. The Club consensus was that she was on “pretty safe ground”, even if cars would soon be floating above it.

Fifty years later Ms. Dixon’s predictions look a little off, to say the least. Cars are still very much rooted to the potholed roads. Fossil fuels remain the dominant source of motive power, especially if you want to go fast or far. Perhaps her most accurate prediction was for devices to protect against collisions. Some cars now offer automatic braking systems for when they detect an obstacle in front of them, such as another sleepy commuter. But even that isn’t widespread yet.

Jumping forward to 2016 itself, when it comes to cars, all the hype is about the self-driving variety. According to the technologists we’re all going to be whisked about in self-propelled pods within five or ten years.

Only a modest amount of thought gives reason for much doubt as to the claims…not to mention that it all sounds rather dull. The real world of driving is a complex place that perhaps programmers don’t spend enough time in. But that’s a story for another day.

In the meantime the tech sector has been booming, especially in the stock markets and the world of venture capital. In fact, in a sense it’s been booming for decades, as more and more electronic gadgets and gizmos wheedle their way into our everyday lives.

The problem for tech investors – even in the successful companies – is that just as fast as products wheedle their way into our lives something else comes along to wheedle them out again.

The pace of obsolescense seems to grow faster and faster. Vinyl records were around for many decades. They’re even enjoying a niche, but spirited, revival. Cassette tapes lasted a generation (and offered us the chance to record the charts from the radio). Compact discs took away our ability to record, and were around for twenty-odd years before heading into declining old age. The original and groundbreaking iPod lasted a little over ten orbits of our home planet around our closest little star.

When they start beaming music directly into our brains I don’t expect the system will last for more than a couple of years. After that we’ll upgrade to something that instantly transmogrifies us directly into Mozart, or Jagger, or Kanye West (select your “genius” according to personal taste…).

My parents had the same fixed line telephone handset for all of my childhood, and possibly long before I was born. They also had the same TV for about 20 years, and it was already second hand when they got it (a donation from an aunt). About once a year a guy would come from the village to fix a blown valve for a modest price.

Nowadays we’re expected to “upgrade” our mobile/cell phones every few years, and you’ll be lucky to buy a TV that lasts more than five. Is this progress? Maybe…maybe not.

Another example of the tech downside is the way car companies are ramming their products full of more and more tech gadgets. Or the way that tech companies could start making cars (think Tesla or Google, and perhaps Apple).

The mechanical parts of a car are resilient and can last for decades, or they’re easily replaced. On the other hand, all the computer wizzardry and screenery looks dated within a couple of years, basically because it is.

People used to fix TVs when they went wrong. Now it’s cheaper to throw them away and buy a new one. Are we heading towards the throw away car?

Unfortunately there are no amply funded PR departments to point out the downsides to tech. Journalists don’t write breathless articles about how bad the latest smartphone is. That’s because if they do then the gravy train of free handouts will grind to an abrupt halt. Most of the time we’re left to work out the drawbacks for ourselves.

This is not to say that technological progress is a bad thing. It’s just that the hype should be balanced by a heavy dose of reality. Tech promoters don’t do that.

If they’re to be believed then ever faster automation won’t destroy jobs. It will just make everyone have better and more fulfilling employment as we march towards paradise and the promised land (see here for more). For them, perhaps, and other highly intelligent and educated homo sapiens it will be a boon.

But probably not for the hundreds of millions of poor minions who get booted out of their only means of putting bread on the table. Let’s face it, not everyone’s a genius. Vast swathes of humanity will be left behind.

But of course there are genuine upsides. The internet has allowed yours truly to escape the world of huge corporate offices and work in remote locations. In the case of this article, I’m just 10 metres from a beach in rural eastern Uruguay. The internet also allows you to read what I write in a timely fashion, wherever you’re based in the world.

Life expectancy keeps rising, as machines and medicines used for diagnosis and treatment continue to advance. Planes fly ever further on the same amount of fuel, opening the world to even more budding explorers (a lot of them being Chinese these days). Buying shares of a company in Singapore or Russia or Canada, for a reasonable commission, is just a question of finding the right broker with the right technology.

Tech is a big deal, and this isn’t going to change. As I noted last week, the four most valuable companies in the world – at least if the stock market is to be believed – are all technology giants: Alphabet Inc. (ie Google), Apple Inc., Microsoft Corp., and Facebook Inc. At number nine in the rankings we also find Amazon.

They’re a mixed bunch, and with a wide range of valuations. Alphabet/Google dominates internet search in vast regions of the world. Apple makes most of its money selling phones for fat and ultimately unsustainable margins. Microsoft – a positive oldie compared with the rest of the bunch – does software. Facebook is a social network. Amazon sells things online (and rarely or barely makes a profit).

As happens so often with markets, just when things look their absolute best is the moment when things turn out for the worst – at least for investors that are late to the party.

As happens so often with markets, just when things look their absolute best is the moment when things turn out for the worst – at least for investors that are late to the party. Alphabet Inc. (NASDAQ:GOOGL) briefly topped US$805 a share on 2nd February. At the time of writing, just five trading days later, it’s down 13% from there.

The much hyped tech sector is taking a battering at the moment. Twitter Inc. (NYSE:TWTR), a place to broadcast short written messages, is now down 80% from its moment of “peak hype”. That’s when the share price reached US$73.31 on 26th December, 2013.

The shares of LinkedIn Corporation (NYSE:LNKD), a network for business contacts (and therefore a highly unsocial network), fell over 40% on Friday (in one day!). That was just because it modestly downgraded its revenue guidance for 2016. This signals a market that’s on the edge.

Twitter and LinkedIn are both social (or unsocial) media companies, and unlike Facebook Inc. (NASDAQ:FB) they don’t make a profit. But even highly profitable Facebook is a dubious investment at current price levels. The stock is down 15% in the last five trading days. Yet it still has an outrageously high P/E ratio of 78 times 2015 earnings at the current price of US$99.30. (See here and here for my doubts about the investment case of “social betworks”.)

And then there’s biotech. I wrote about “Blowing the lid off bubbletech” in July 2014. As a very serious bubble was being inflated in that sector my recommendation was to stay well away. The bubble continued to inflate for another year to even more insane levels. But then it started to burst. The iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) is down 37% since July 2015 and is now back to its early 2014 level.

With all this uncertainty…with the speed of change…with vast numbers of tech losers…with winners that often turn into losers as new winners emerge….is there a safe way to invest in technology?

I believe there is. More to come…

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.