Look for hidden assets and a strong base of operations to gain the most from your investments in the top tech stocks
It’s natural to think you profit best from technology by investing in shares of top tech favourites. But this can lead to disappointment. Tech stocks are highly volatile. Some early leaders flame out. Others go through long setbacks due to industry downturns, corporate restructuring, regulatory issues and so on.
Journalists and economists make the same mistake as investors. They take too short a view, or expect steady gains, or disregard political constraints. Every deviation from growth makes them ask, “What happened to the productivity dividend we were supposed to see from new technology?”
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People generally fail to recognize the large random element in the speed and payoff of technological progress. It’s totally unlike, say, a steady paycheque, or the interest you get from a savings account. It’s more like the growth of a healthy child. It also resembles the stream of dividends and capital gains that you get from owning a portfolio of high-quality stocks from most if not all of the five major economic sectors—the kind of stock portfolio we recommend to our readers, and create for our portfolio-management clients.
Many of our favourite high-quality stocks are not what investors would consider top tech stocks. However, these companies still profit from technology gains all the same, but they invest in new technology on their own schedule. They wait until the potential gains outweigh the costs in money and time to upgrade. Then they go for it.
New technology from the top tech stocks is percolating through the economy and into people’s lives, but in fits and starts, like any natural process. That process is gaining speed, but doing it so gently that people hardly notice.
Look for hidden value in research and development to spot top tech stocks
Technology stocks have always represented a more aggressive segment of the stock market, but the top tech stocks with the greatest long-term potential are those that continue to make significant investments in research and development.
The investment odds are against you in a “hot” market—one where investment appeal is widely, if not universally, recognized. And many tech stocks, especially in a market like the one we’re in now, are overpriced. This is because many investors have inflated ideas of their value.
You can turn the odds in your favour by investing in tech stocks that have hidden assets. These are assets that other investors very often overlook and are a key part of our Successful Investor approach.
Hidden assets are items that don’t necessarily show up on a company’s balance sheet, but can offer dramatic rewards for investors who do their research.
Among technology stocks, research-and-development spending is today’s best-hidden asset. High research-and-development budgets let tech stocks keep adding profitable new products and improving existing ones.
Technology stocks have to treat this spending as a day-to-day expense, much like maintenance or taxes. So research spending lowers the current year’s earnings. As a result, earnings per share for tech stocks may appear lower than for stocks in other industries. But, when done right, research and development spending pays off in dramatic long-term returns, both for high-tech companies and for those who invest in technology stocks.
Develop a middle-of-the-road approach for investing in top tech stocks and profit over time
This comes naturally as you develop a successful investor mindset. A steady, middle-of-the-road approach offers better odds than erratic or extreme alternatives. That’s because it relies less on timing, or on guessing right about the future. Instead, it helps you take advantage of what you might think of as the laws of financial physics.
For example, successful investors mainly invest in stocks that own prosperous businesses. That’s because these businesses tend to continue to prosper. Those that are failing may keep on failing, barring rare and unforeseeable revival efforts. Businesses that have not yet prospered may never get anywhere, no matter how much temporary success they find in the stock market.
You still have to decide what stocks to buy and what stocks to sell, and some of your decisions will disappoint you. But with the right mindset, your best choices will produce a lot more profit over long periods, and will overwhelm the costs of your disappointments.
If you’re going to hold a tech stock in your portfolio we recommend that you only hold the very best—such as the stocks we recommend in our newsletters.
Find the top stocks to profit from—including top tech stocks—by using our three-part Successful Investor approach
Invest mainly in well-established, mostly profitable, dividend-paying stocks;
Spread your portfolio out across most if not all of the five main economic sectors;
Downplay or avoid stocks in the broker/media limelight.
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