If identified correctly, the benefits of investing in new technology can provide a boost to your portfolio returns
The success or failure of new 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.
There may be benefits to investing in new technology though, especially if the technology looks like it has a good chance to be commercially viable and is not merely speculative or conceptual.
Take a realistic view of the benefits of investing in new technology
When listening to predictions, especially gloomy ones, keep in mind that nobody can consistently predict the future. Also remember that the most widely accepted gloomy predictions are especially prone to fail. That’s because people, as individuals, react to and prepare for predictions of doom. They work on the problem before its predicted arrival time. Sometimes that offsets it entirely.
The ultimate example tied to technology came on the first day of this century, with the non-arrival of the so-called “millennial bug,” or Y2K for short.
In the late 1990s, computer consultants warned that at the stroke of midnight on January 1, 2000, computers around the world would freeze up because of a problem with their data-storage limits. Computers used to use just two digits to designate a year. So they wouldn’t be able to tell what came after 1999; ‘00’ could mean 1900 or 2000. The problem had a simple fix, however. By the last day of 1999, most computer owners had attended to it. Damage from the predicted crisis was negligible.
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Other technological concerns have since developed, particularly in regards to the limits of artificial intelligence (AI) and driverless cars. The logical flaw here is that exploding computer power at shrinking cost is a technological advance. But there are social, legal and practical limits to how quickly business can translate these technological gains into real-world progress (or problems, depending on how you look at it).
The funny thing is that fears about job losses from driverless cars and AI are common right now, just when a shortage of workers—not a surplus—is an immediate problem for business.
Instead of worrying about a jobless future, focus on how future shortage of workers may lead to a couple of economically healthy developments:
A rise in wages, as growing companies bid against each other to expand and improve their workforce. Rising wages tend to spur consumer spending, which fuels additional growth; and
A rise in capital spending. Businesses will need to improve their tools and equipment, so their better-paid workers will be able to expand their output and earn their higher pay. This raises productivity, which also spurs growth.
These two factors can feed on each other. They can lead to a lengthy boom in the economy and the stock market. We don’t need to guess when the boom will start, or how long it will last. We just need patience.
Discover what savvy investors know before they invest so they can get the benefits of investing in new technology while it is still growing
There’s a delicate balance between risk and reward with tech stocks.
Many new tech stocks are brought to the public through major investment banks, but are still unknown to most investors. This makes new tech stocks even more intriguing to some investors.
The best tech stocks are on a rapid growth path and will continue growing. Some of the best technology companies eventually become so successful that they start paying dividends. Investors should also scour a technology stock’s financial statements to glean any hints of hidden value such as research and development or other valuable long-term assets.
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.
Fast-changing technology offers huge opportunities when investing in new tech stocks. However, fast change can also bring dangers. Technology stocks may have a role in your portfolio, but you should be well aware of the risks involved with high growth securities like tech stocks.
What you need to know about a stock before attempting to reap the benefits of investing in new technology
Is there a history of success?
Often tech stocks will offer different classes of shares that come with various shareholder voting rights. Investors can save money by purchasing the lower priced shares.
A strong reputation helps win new contracts.
High cash and low debt aids new product development.
High research and development budgets let tech stocks keep adding profitable new products to their lines and improving existing ones.
Look to companies that spend on research and development to get the benefits of investing in new technology
Research and development spending has the potential to pay off with 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.
Many new tech stocks start as speculative pennies. What would lead you to invest in these types of stocks?
What indicators do you look at to determine which tech stocks might make good additions to your portfolio?
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