When you are looking at what tech stocks to invest in, you should first decide on how much risk you are willing to take.
All stocks carry risk. So when looking in the technology sector, and which stocks to put your hard earned money behind.
You need to decide on what type of stock you a comfortable with. I have three categories.
- SAFER. An excellent solid Technology Stock that has a long track record and pays a dividend while you wait for it to appreciate slowly. Reinvest these dividends, and these stocks frequently serve you well. Be sure to keep an eye on them. Read company news. Keep in touch, don’t just put your money into a stock and then leave them for months on end without a thought.
- HIGH RISK A preproduction company. Is ready to unleash its goods on the market. Hence much larger price appreciation. Also, you need to remember the management need to deliver on their promises (not that easy to find). It will also take a lot longer than you thought, I am talking possibly years.
- HIGHER RISK A development stage company. Still in the lab phase and looking for its first customers or has just started implementing their designs on the world. There is a long way to go for these companies. However, if they find a way through the many barriers that confront them. They may become the next Google. Then who knows your thousand dollars or Euros might just become a million. You need to be so very patient. You need to prepare for the long haul, I am talking many years, and it could always take a great deal longer than you first thought. Be meticulous in your research. Some will fail, some may make you very wealthy.
In this post, I will concentrate on buckets 2 and 3. In doing so I think, you should also consider a few simple rules before you buy. I use these and sometimes not as much as I should, no one is perfect, and as an engineer and writer, I have even less time. However, you need to make as much time as possible.
Leave your feelings for family and friends.
Leave your feelings for family and friends. If you invest with the fear and greed mentality, you will most likely lose everything. I am not joking. You need to be cold, hard, and analytical. Your investment may reduce by 50% or more! Then you need funds to double down if your research is sound. Lower your cost of ownership. It takes guts some say. You have to rely on your research. You have to know that your stock is a good option for future growth. If you are unsure, then get out and find a security that suits you.
Do they have patents protecting their IP?
Good quality patents are essential for new technology companies to be able to protect their products. Without a good patent portfolio, the company may eventually be copied and taken over. Great ideas are worth nothing in the investment and business world unless they are protected or hidden. Some patents are better than others.
Do the management team have a good record of accomplishment?
Many times in my history of investing have I fallen for the claims of management teams or an over-ambitious CEOs. Look for stable management teams that give deliverables that are possible. Use your best judgement and think BS until you see proof that they have clients ready to buy or come on board. Here it takes a lot of what ifs and the risk is high.
If CEO Joe, says “ We will be able to XY and Z” ask how?
Is their product or service groundbreaking?
Does it set them apart from the competition?
The review of their competition, and understand the pros and cons. It is harder than you think. Make sure you spend time understanding what other options are available to their prospective customers.
Do they have enough money?
You can generally be able to put companies into three buckets:
a. Stable have enough money for a minimum of 2 years or more assuming they have no sales.
b. Stable but may need to raise funds in the next year or two.
c. Will need to refinance in the next few months.
Using these three buckets, you can understand when they will need to refinance the company. Companies can do this in a few ways. One of the most common is to add shares at a reduced price. For example. If they need $10 million and the company shares are currently priced at $5. It means they will have to sell over 2 million extra shares. There the total number of shares are diluted. So either have money put aside or understand the implications.
Listen to the shorts.
These guys are putting real money on the table expecting failure. Why would they do that? Just remember, they are not the enemy;
Well, some are complete tyrants and just put out false information to get people to panic. They want the stock to tank so they can pick up a quick profit.
Some have different opinions and quite likely contrasting thoughts to you. I have no doubt, you could often fundamentally disagree with them, but do not discount everything they say. Look at what they articulate, and you will see there is sometimes value in it. Use this to justify your research or if there are unanswered questions try to answer them. If you cannot then you have to accept that they have identified a risk in your thesis. Remember nothing is one 100%. Not even Google of Amazon had an easy time in the early days.
Does the company have talented investors backing them?
Backers of companies sometimes get overlooked. Find out who is investing in the company. Do they have a track record of success? Even the smartest investors remember to put their money into failed companies. However, less often than you think. They have inside knowledge and can get the information you cannot. They have connections you or I would never in a month of Sundays be able to develop. So, if they are putting their funds into a new venture then unless they are looking for a tax loss you have to assume they have done their homework.
Read as many different newsletters as possible.
These give you are a sense of the market, the climate for investing, a good overview of what is happening in that field. Many do not do well in researching these startups. Some do a great deal of careful research and have interesting insights that you may have missed. In future posts, I will be reviewing newsletters that I have subscribed to over that past few years
Pros and Cons.
Once you have completed the above, you should have a good idea if the stock you are interested in has potential. You should be able to write up a summary, pros and cons. If you don’t have any cons, you have not done enough research. Remember, there is always a risk. There is never all good news. There are still trade-offs. Understanding these in whatever you invest in will help you become more profitable in the long run.
Finally, hold on tight.
There will be up days and down days. There are going to be up months and even down years! Stick to your investment research and maintain a level head.
I have a few companies that I am considering sharing in the next few posts. I was waiting for this quarters conference calls. Once I have finished my reviews, I will give you my thoughts. You can then do your due diligence.