Investing in technology companies may sound daunting at first. Most people barely know how to use a tenth of the power of their smartphones, for instance. How can they be expected to understand how to invest in the companies that make them?
But the reality is that investing on one level is pretty simple. I don’t want to go overboard with this idea, because it can definitely lead you astray at times, but it is not unreasonable to start out with the notion that you should buy shares of companies that make products that you like.
Purists and veterans of the market will make a big “T” for time-out with their hands after a comment like that, arguing that it is way too simplistic. And it’s true. It is simplistic.
But as just a first pass at the concept it actually makes a lot of sense, as long as you are early, and right, and your tastes are in the forefront of the mainstream. And as long as you have an expert by your side to help you realize when enthusiasm has gone too far and made the stock expensive.
|You can’t have a great consumer electronics company’s stock without great consumer products.|
Apple (AAPL) is a great example. The stock had languished for most of the 1990s as a second-tier maker of quirky personal computers favored by artists, hipsters and children. By 2001, it was literally trading for less than the value of its cash on hand.
Around that time, a friend who was Steve Jobs’ top independent marketing advisor stopped me cold with a comment while we were out cycling on a sunny Seattle summer afternoon. After lamenting that Wall Street was acting as if Apple was worth more dead than alive, he said that if analysts and investors only knew what the company was working on they would not be so negative.
My friend would not even tell me what the product was at the time, but it turned out that he was referring to the first iPod. Now it’s a little hard to comprehend, looking back over the past twelve years, that Apple’s incredible fortunes began with a technology so humble that it is essentially given away free now as part of your mobile phone. But the tremendous reaction by the public to that sleek, white piece of engineering art, and the unique idea of buying music for it a la carte from the iTunes store at 99 cents a pop instead of ponying up $15 for a CD, was in fact the catalyst for the explosion in Apple shares.
Now if you think back to the first iPod that you bought, or bought for your kids, you must have known it was something special. For a while Apple iterated on that design, upping the memory capacity, changing the form factor, creating versions like the Nano and the Shuffle, and all that time the stock was still cheap and your pure, naive appreciation for the product was enough to make you an investor.
Then in January 2007, the company introduced the iPhone, which most critics initially called a ridiculous idea. It seemingly made no sense that a computer and music device maker could conquer the difficult world of mobile phones. But the public loved it, and the company manufactured it well. That was another opportunity for consumers just to use common sense to buy Apple shares at around $100-$125.
Meet Money and Markets’ new technology stock specialist,
Jon began his career as editor, investment columnist and investigative reporter at the Los Angeles Times. As news editor, his staffs won Pulitzer Prizes for spot-news reporting in 1992 and 1994.
In 1997, Microsoft recruited Jon to help launch MSN’s finance channel, where he served as Managing Editor. In that capacity, Markman became the co-inventor on two Microsoft patents.
From 2002 to 2005, Jon served as portfolio manager and senior investment strategist at a multi-strategy hedge fund.
Since 2005, Mr. Markman has specialized in helping everyday investors buy tomorrow’s technology superstars BEFORE they skyrocket.
Mr. Markman is the author of five best-selling books, including Reminiscences of a Stock Operator: Annotated Edition; New Day Trader’s Advantage, Swing Trading and Online Investing.
And then a few years later in April 2010 came the iPad amid more broad skepticism, and another opportunity just to use your consumer intuition to buy the shares of a company that made great products, this time at $250. That was a time when the shares were still on track to nearly triple.
Now as it happens, the shares did top at around $700 in 2012, falling by nearly half in six months. But that’s where having an expert around comes in handy. After recommending the stock for years, I recommended that my readers exit the shares in September 2012, a few bucks below the high, because the price had reached a super-extreme level in my valuation model and because I felt that the company had given up on its tradition of innovation by not improving the iPhone in the face of incredible new competition from Google (GOOG) and its Android ecosystem.
Yet the bottom line is that even if you had not taken that advice, and held onto the shares, you’d still be way ahead today just by following your common sense as a consumer that one company had created a product so special that it has become ubiquitous despite the lack of discount pricing.
You see? You really can be a technology investor without putting in the time it takes to earn an engineering or product design degree. You can just use your common sense.
More examples abound. How about Google itself? Who did not love the search engine when it was introduced? Who could not have seen the value of search-based advertising? It was right in front of your nose, not to mention fingertips, as a consumer in the mid-2000s. And the advent of the Android operating system by Google occurred in October 2008.
I can go down the list of many other successful companies whose products you love. It’s always the same. You can’t have a great consumer electronics company’s stock without great consumer products. So you just have to realize the opportunities are in plain sight most of the time, if only you take the time to dream big about how the shares can benefit you as much as the service or device.
Of course when it comes to some of the business-to-business companies that we have discussed recently, such as Workday (WDAY) or Cornerstone OnDemand (CSOD) or Splunk (SPLK), you are going to have to take my word for their value. But if you work in human relations, you may have realized what kind of value Workday brings to businesses. Or if you work as a factory manager, you may have been introduced to the data-mining genius of Splunk. Or if you are a surgeon or nurse, you may have seen the value of the post-op pain meds offered by another company we have recently discussed, Pacira Pharmaceuticals (PCRX).
The bottom line is that while you may not be a technologist or an engineer, you either use or come into contact with the products and services that help build great businesses. And it doesn’t take much more time or effort to turn that knowledge into success with a company’s shares.
This advice comes with a big yellow caution flag, of course: Not all good products have great companies behind them, even great companies can get overvalued, and your idea of greatness might be idiosyncratic and not widely shared. But it can at least be a good starting point.
P.S. Let’s talk tech stocks! Have you made money with a tech stock in the past year or so? If so, tell me about it! Simply click this link to jump over to the Money and Markets blog.