The best strategy for successfully investing in tech stocks includes—above all—finding companies that invest heavily in research and development.
Virtually all successful investors take a broad view, and apply everything they know to their investing decisions.
This includes learning what you can from famed-investor Warren Buffett. If you want to approach investing in tech stocks like Mr. Buffett, you need to have some understanding of long-term investment strategies.
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Investing in tech stocks like fabled investor Warren Buffett: Look for long-term fundamental value
If you want to invest like Warren Buffet, you have to take a broad view in making investment decisions—with a focus on fundamental value and paying special attention to hidden value.
Buffett’s first great investing achievement was to sell all his holdings in 1969, just prior to the early 1970s market downturn. He felt that 1969 stock prices were simply too high, from a value investing point of view. He re-entered the stock market in 1974, after prices had collapsed by 40% or more. This alone established his investing-legend status. Since then, he has achieved a better-than-average investing record by buying large stakes in a handful of well-established companies.
One thing you won’t find in the making of Buffett’s stock-market fortune is a history of relying on any single investment theme or gimmick. The main contributor to his success is his history of excellent stock-picking, and his practice of holding his top picks for a long, long time.
Focus on these characteristics when you’re investing in tech stocks
The best tech stocks are on a rapid growth path and will continue growing. Some of the best technology companies become so successful that they start paying dividends.
Investors should also scour a technology stock’s balance sheet to glean any hints of hidden value like real estate, research and development or other valuable long-term assets.
The success or failure of the best tech stocks depends on a variety of factors. A company may start out with a promising business plan. But it needs all sorts of things to prosper in the long run: the right employees, a favourable economic and regulatory climate, a favourable competitive environment, positive research outcomes, adequate financing, perhaps the right merger partner or acquisition—the list is long.
Successful tech stocks can experience enormous growth. However, technology stocks are also susceptible to lots of market volatility—and negative news can throw tech stocks into steep declines.
Recognize that investing in tech stocks can expose you to more volatility than other investments might
Junior technology stocks are considered aggressive investments. For this reason, when we pick stocks in the more volatile technology field, we make it a priority to focus on firms with high research and development spending. That’s because technology stocks have to treat their research spending as a day-to-day expense, much like salaries or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings.
As a result, many tech stocks’ earnings per share may look lower than those of stocks in other industries. But, in fact, taking out research spending, they are much more profitable than they appear. That causes some investors to overlook promising tech firms, or to see them as overpriced.
Research and development spending has the potential to pay off in dramatic long-term returns. That’s because the products that grow out of this spending will help tech firms increase their sales and profits over the longer term.
We see high research spending as an especially powerful ingredient for technology stocks that will profit from a global economic recovery. That’s because they’ll be ready with new and improved products that businesses and consumers will want to use when they increase their technology spending.
Investing in tech stocks over the long term
Long-term investment strategies aren’t built by making a fast dollar, or profiting from inside information. Warren Buffett doesn’t advocate that investing approach. They are built over time, and most importantly, by learning how not to repeat the market mistakes of the past.
How do you feel about the future of tech investing, and is it still an industry you seek long-term investments in?
What qualities do you look for in tech stocks that make them a potential long-term investment?
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