Capital
Ideas: High-Tech Tactics
You
don’t have to be an expert to make a killing — but you must be careful to
avoid getting killed.
Should you invest in the technology stock sector? The short answer is simple and emphatic: Yes. Still, before you make up your mind, you should consider the two reasons to avoid the sector: Technology stocks are risky and they are difficult to understand.
During the past three years, funds that invest primarily in the technology sector have been more than twice as volatile as the average stock fund. During 1997, investors in the technology sector suffered not one, but two major setbacks. The first came in February, when some companies involved in creating and servicing computer networks reported disappointing profit growth. The second setback came in October, when the Asian economic turmoil provoked fears that some technology companies would suffer from slumping sales in the region. The uncertainties continue.
If that doesn’t worry you, consider the problem that technology stocks are difficult to decipher. Famed stock market investor Warren Buffett once gave that as his reason for avoiding the sector — and he’s done pretty well without help from the likes of Microsoft, Intel, or Netscape.
Moreover, the technology industry is getting more complicated every day. What the heck is enterprise resource planning software? And how about computer-telephony integration? If you don’t know the answers, some people say you should stay away from this sector. They probably are wrong. Even if you are a conservative investor who doesn’t know a thing about technology, you should invest at least a portion of your money in the sector.
Why? In a word, opportunity. The demand for technology products is tremendous, and growing fast. Spending on technology products was less than 5 percent of our nation’s GDP a decade ago, but should rise to 20 percent by the year 2000. An estimated 40 million people now use the Internet — and that number will likely quadruple to 160 million by 2000. Global trade of information products is expected to double to $1 trillion during the next three years or so.
A PIECE OF THE ACTION
There are at least two ways to take advantage of that enormous growth. One is to
identify the most important trends in the technology sector and invest directly
in companies that will benefit from them. Another is to find a mutual fund whose
manager can do that job for you.
For many investors, the second strategy makes sense. But before you try to choose a technology fund for your portfolio, it’s important to understand something about the trends that will drive technology growth in the coming years. The most important trends include:
• More efficient computer networks. The explosion in computer networks during recent years has left many firms desperate for advice and equipment that will help them manage those networks. As a result, companies that can provide that help will prosper.
• A growing number of computerized devices. Increasingly, the microprocessors that act as the brains of computers are showing up in toys, phones, washing machines, and the like. Devices let you communicate with networks without using wires, such as the PocketNet cellular phone from AT&T that will let you get e-mail from a personal computer.
Tony Rizza, the portfolio manager for the PIMCO Innovation Funds, which invests mainly in shares of high-tech companies, estimates that the market for cellular and other wireless communications will grow 30 percent annually during the next few years. The expansion will be driven, in large part, by overseas growth.
• New uses for computers. Bank on it: You’ll soon be able to tell your computer what to do without using a keyboard. A wide range of companies are working on technology that lets computers recognize and respond to voice commands. Other companies are devising technologies that will enable computers to handle multimedia applications from videoconferencing to three-dimensional on-line shopping.
• The growth of the Internet. As access becomes cheaper and faster, more homes will log on to the Internet. This trend will be driven by the growth of on-line commerce — the ability to use the Internet to buy everything from cars to pencils.
SOME GUIDELINES
If you’re willing to do significant research about technology companies and
their markets, you might want to add a handful of individual stocks to your
portfolio. Make sure you don’t invest more than 15 percent to 20 percent of
your long-term savings in the sector, and spread the money out among at least
five or six companies so that no single firm can sink your portfolio.
Michael Murphy, the editor of the “California Technology Stock Letter,” recommends five companies that form a well-diversified technology portfolio. They are:
• Applied Materials Systems (AMAT), the world’s largest semiconductor equipment manufacturer.
• Intel Corp. (INTC), the largest microprocessor manufacturer.
• Seagate Technologies (SEG), the hands-down leading company today in the hard disk drive marketplace.
• Cisco Systems (CSCO), makes products that allow computer networks to function.
• Adobe Systems Inc. (ADBE), the fifth largest software company in the world, makes multimedia desktop publishing software that’s a big hit among many Web page designers.
FINDING A FUND
Most investors aren’t willing to do the work required to manage a selection of
individual stocks in the technology sector. For one thing, technology products,
markets, and companies change rapidly, and some of the changes may be difficult
for an amateur investor to understand, let alone predict. Thus, the typical
technology investor does it through funds. In fact, you may already own shares
in a fund that buys technology stocks because statistics show the average
diversified equity fund holds a 15.7 percent share in the technology sector.
It might be worthwhile, however, to put some money to work in a fund that specializes in the sector. Unlike more diversified funds, most technology funds benefit from the fact that their managers are specialists who can devote all their time searching for promising new technologies or emerging companies.
Which fund should you choose? These days, investors can pick from among a wide variety of technology funds — at least 53 separate portfolios. The best bet for most of us is to find a well-established fund that invests in a range of different industries within the technology sector.
Now that you know some of your options in the technology arena — and also know a little bit about the opportunities they can afford — it’s time to return to the beginning of this story. Always remember that technology stocks can be risky. If you are looking to make money this year, don’t buy them. If you want to make money during the next decade — well, that’s another story.
Clint Willis, a free-lance writer in Portland, Maine, writes about technology companies for Forbes, ASAP, Worth, and other publications.