How to invest in technology
The technology sector can be hugely profitable for investors. But how do you pick the right companies? In this video tutorial, Ed Bowsher explains how to invest in tech stocks.
Technology can be a hugely profitable sector for investors.
If you had invested in Apple or Amazon at the right times, you could have grown your money by 10,000%!
Obviously not all technology investments work out as well as this, so in this video I look at the pros and cons of the sector, and how to go about investing in it.
So let's dive in, and start looking at some of the pros for investing in technology. I guess the real big one is that if you get it right, you can make big profits from technology investing.
Let's look at a couple of examples. If you'd invested a couple of thousand pounds in Amazon ten years ago, your investment would now be more than £16,000. And if you had invested £1,000 in Google five years ago - not ten, five years ago - your investment would now be worth over £4,100. Not bad.
The point I want to stress here is that ten years ago, Amazon wasn't some tiny little startup with three guys in a garage. Most people had heard of Amazon in 2004. I had been buying books for two or three years; and the company had briefly moved into profit. This wasn't a super high-risk, speculative play back then.
And nor was Google. By 2009 most people were using Google, it was making big profits and there was plenty more growth to come. You weren't investing in a really speculative, high risk play.
Another big plus point to make clear about technology is that not all valuations are crazy. The tech sector has a reputation for companies being valued at two or three hundred times their profits for the last year. There are companies like that, but there are plenty of other tech companies on reasonable valuations.
And that's even true now, in March 2014.The stock market has been buoyant for a while, so you'd expect many tech stocks to look expensive, but even now there are plenty out there that don't look too pricy.
Microsoft today is on a price/earnings ratio https://moneyweek.com/glossary/p-e-ratio/ of 14, that's a mid-range, perfectly reasonable evaluation. Microsoft has its issues, but it's also exposed to a big, sexy growth sector: cloud computing. The valuation isn't ridiculous. So please don't think you can only buy technology stocks on really high valuations.
Another crucial point is that when we look at the economy, and it goes through its inevitable booms and busts, technology carries on growing. I'm not saying it's not unaffected by the economic cycle, but even in bad times, because the amount of innovation is so vast, the sector carries on growing as a percentage of the total economy.
I like to be invested in sectors that carry on growing and have lots of potential for the future.
I think there is a real step up at the moment in the pace of change and innovation. We're seeing lots of sectors that in the past have not been that exciting, and have not had that much change, which have suddenly picked up the pace.
We're also seeing some new sexy technologies sectors coming through as well.
For examples, 3D printing. It's not a brand new technology, but it's really picked up, it's becoming much more exciting, applications are coming through all the time.
Then there's big data. https://moneyweek.com/big-data/ I don't know if you've heard of that one; it's the idea that we're all now creating an enormous amount of data as we go through our daily lives, using our smartphone, for example. We're leaving information about where we are, what we're buying, who we're talking to, what we're interested in, what we're talking about.
All that data is massive, and it can now be analysed by the super computers that are out there, and that helps big marketing companies like Amazon target us more effectively.
And big data is not just about marketing at individuals like you, and me. It's got a wide range of other applications across society.
For example Red Bull, the Formula One team, have been using big data very effectively. They were the first big Formula One team to start using this technology area, and it's meant they've become the paramount Formula One team. They can analyse what you should do in different kinds of weather; what you should do when different aspects of the car go wrong; and the precise driving behaviour of each of their drivers. That's given Red Bull a real step up in the world of Formula One.
Another application is in Mountain Rescue. Now there's all this information that's out there about what happens when mountain climbers get into trouble at different points of the mountain. Or what they've been saying on Twitter, or what the weather was like when they got into trouble. So Mountain Rescue services can now look at what's happened in the past, analyse the data, and so respond to a call in the most effective, and rapid way possible.
Big data has loads and loads of other applications. It's a big, sexy growth sector of the future. One British company that's a play on this sector is called 1Spatial, it's quite young, quite small, but well worth a look. And I think there's going to be plenty of other companies prospering in this space.
Another interesting area is what we call immersive technology'. It's similar to something called the internet of things' that you may have heard of. The internet of things is this idea that you could talk to your central heating system at home from your smartphone at work. So you could turn on your heating a half an hour before you get home.
But immersive technology is about much more than just that.
It's also looking at things like how in ten or 20 years' time we'll have little sensors on our thumbs or behind our ears, and we can use those sensors for paying at shops, or gaining entry to our home, getting securely into our home, loads of other applications. Also, these sensors can monitor our health, and give us advance warning if things are about to go wrong.
Really sexy sectors here, lots of innovation, plenty of potential for private investors to make money.
So what about the cons? There are cons. Often, as I said, tech companies can be on very high valuations. Sometimes the companies grow fast and justify those valuations, but it's always tough to know in advance which of the big companies are going to be the future winners.
It's always a challenge to pick the winners of the future, and it's hard to value tech companies - especially ones that aren't making profits yet. So these are traps, these are challenges for all of us. We all remember the dotcom crash in 2000 - that's the ultimate example of what can go wrong with technology investing. How hard it can be to pick the winners, how valuations can get swept away just by psychology, by momentum, and people got carried away.
But right now, it's a different world from 2000. Technologies are a much bigger part of the economy, companies are making profits, or if they're not making profits, they're not far off from profits, and evaluations are not so crazy.
So I don't think you're going to get caught out in the way you would have been in 2000. You may still lose money if you get things wrong, but it won't be the horrendous slaughter house that we saw 14 years ago. And if you're prepared to invest for the long term, I think you will potentially make big money from the sexy growth sectors.
So how do you go about investing in technology? Given it can be hard to pick future winners when they're not making profits now, you definitely want a diversified portfolio.
One option would be to build a portfolio of, say, eight technology stocks, a mixture of big and small. You can have some of the Googles, some of the Amazons and Microsofts where the risk is a bit lower, but also have a few smaller ones where the risk - and the potential reward - is higher. Still, it's tough to pick these stocks, and pretty risky even if you have an eight share portfolio.
So the simplest approach is to go for a good technology fund, in particular an investment trust. There's an RCM Technology investment trust which has a very good record. It's risen by almost 200% in the last five years. It invests in the big boys, the Googles, the Amazons, the Apples. A great one to invest in.
Also, you might consider one called the Herald investment Trust which invests in smaller technology companies; often British and European, as well as a few American. It's done very well over the last five years, about 240% return.
Whatever you do, I think it's a mistake not to have any exposure to technology. Don't put all your eggs in one basket and just invest in technology, but given the future growth potential, you really need to have some money in this area.
I'll be back with another video very soon. So until then, good luck with your investing.