How to invest in tech firms and stay on top: four golden rules
$1,000 invested in Amazon in 1997 would now be worth $151,000... something to think about
THE PROSPECT of Twitter's float has reawakened investor interest in the tech sector, says Richard Evans in the Daily Telegraph.
Buy the right company, and the returns can be spectacular: $1,000 invested in Amazon when it floated in 1997 would now be worth $151,000. But make the wrong choice and you can "kiss goodbye to your money". Just ask the numerous members of the "90 per cent club": companies whose shares fell by nine-tenths or more during the dotcom bust.
Here are some tips for "sharing in the gains produced by the unceasing flow of technical innovation" – without, hopefully, losing your shirt.
Safety in numbers: Buying a fund gives you diversity and reduces your risk. Darius McDermott of Chelsea Financial Services likes GLG Technology, which has a good geographical spread across Asia, the US and Europe and looks for game-changing "disruptive" technologies. He also rates Axa Framlington Global Technology, "which is more biased to the US, but includes investments in smaller companies".
Choose a tracker: If you want diversification but aren't convinced a fund manager will identify success stories, go for a tracker. These funds automatically buy shares in a relevant index, such as the FTSE Techmark, and costs are usually much lower. L&G's Global Tech Index fund, for instance, charges just 1.16 per cent a year.
DIY advice: If you're determined to pick your own stocks, the key questions to ask are: how vulnerable is a company to new competitors, and is there a credible plan for turning a large user-base into some form of revenue generation? If a company is already profitable, what are its chances of staying that way? Apple, for instance, has fallen out of favour with investors recently. But, as Jeremy Gleeson of Axa Global Technology points out, the large numbers who've signed up to the app store and iTunes are likely to carry on spending with Apple "for many years to come". Shares are also less highly valued relative to earnings than, say, Microsoft – "very surprising as Microsoft has probably stopped growing". Gleeson also remains a fan of Google, which has demonstrated its ability to turn popular online services into money, and is on the brink of producing serious profits from YouTube as the video service evolves into a "television channel".
Think cyclical: If you're buying individual stocks, this could be a good time to veer towards larger tech and IT firms, argues Miles Standish of Fisher Investments. The largest companies "tend to out-perform in the second phase of bull-markets", partly because they benefit from increased IT spending by corporate customers.
This article appears in the 28 September 2013 issue of The Week. ·