How to Vet and Understand Tech Stocks

choosing-tech-stocks

The tech sector represents one of the biggest and hottest investment opportunities out there today. Currently, it is eclipsing all other sectors – including finance and industry – and the rate of innovation is speeding up thanks to a non-stop pipeline of fresh technology products and services.

The numbers don’t lie! Tech stocks have returned 11% in 2018, even with recent market volatility. Unfortunately, only a small percentage of people are tech-savvy enough to dive right into this sector without first studying why tech investors have so much to gain and why it’s easy to lose your shirt if you make the wrong decisions.

I created this primer to help you understand the exciting world of tech stocks (and its quirks) so you can make smarter investment decisions and capitalize on the thrilling opportunities emerging daily. Here’s what you need to know:

Tech Stocks are Important

This should be obvious, but many people don’t make the connection between, for example, the components in their electronics and the DOW. Tech products and services are fast becoming the underpinning of the world’s economy, even for industries that seem non-technological from a consumer’s perspective, like mining. Technology enhances productivity, quality, design, awareness, and profitability across sectors. In short, tech touches everything, and so there’s a lot of money to be made for clever investors.  

But Tech Stocks are Different

The ubiquitous nature of technology is also troublesome. Investors who put their money in tech stocks have to deal with both an even faster cycle of obsolescence and a hyper-connected world where hollow trends drive investment booms (and busts). Companies are constantly jostling for positions in the tech space, and today’s winners won’t necessarily be tomorrow’s. That said, Apple and Microsoft are both tech kings that went through periods where it looked like they’d go the way of the dodo. Determining which companies, products, and services will be on top in the far-flung future can be tough. But it is possible!

Radically Different, Actually

One thing that sets technology apart from almost every other investment sector is its extreme interconnected nature. I can see the threads connecting industries like biotechnology, big data, smart materials, and other areas of tech, as well as the profit opportunities that most people overlook. Smart investors will sniff out breakthroughs on the horizon by tracking the most recent breakthroughs across industries – not just in a single industry.

There are Analysts Who Specialize in Tech Stocks

And you should be following them, because these are the experts who are clued into the sector’s growth potential as well as the interconnected opportunities described above. Technology in general can be challenging for laypersons to understand, and even tech professionals at the top of one industry can find other industries baffling.

Analysts who specialize in tech stocks, like myself, have usually studied the science behind emerging innovations and have been part of the tech sector in multiple roles (scientist, journalist, CEO, etc.). To understand new technologies like quantum computing, smart metals, and cryptocurrency, look to the investment analysts who have backgrounds in those fields.

You Might Win Big by Investing Thematically

If studying up on the tech sector as a whole seems like an overwhelming undertaking, keep in mind that you can choose to invest in tech stocks thematically. There are numerous funds that are focused on companies that specialize in one slice of the tech sector, e.g., automation and robotics, cloud computing, cybersecurity, and alternative energy. ETFs aren’t perfect, but they do let you build a relatively diversified portfolio without having to become an expert in divergent technologies.

The Product Cycle > The Business Cycle

The business cycle as we once understood it is now less important than the emergence of new markets, products, and services over time. Obviously fluctuations in the macroeconomic environment and the phases of the economy will impact the value of your tech stocks, but information technology (to give one example) typically shows a healthy performance at all points in the business cycle. Look instead to the product cycle for guidance on when and what to buy.

Innovation Should Drive Your Tech Stock Choices

I like to tell people that successful tech investors are the ones that recognize innovation is key. You should be looking for companies in emerging industries that have the potential to capitalize on massive markets with products and services that are not just hot now, but highly desirable across populations. Look at your own wants and needs and see what you can infer about where technology is headed. Make your own predictions based on your own life and research, and then follow the tech analysts to see if they’re seeing the same things. Could you have predicted the growth of cloud computing? Or smart technology?  

Trends Aren’t Always Tricky to Spot

Trends in investing can seem illogical to the point where many novice investors feel incapable of making informed decisions. But in the tech sector, especially where consumer products are concerned, it’s not always hard to spot winners. Unless there are glaring red flags or experts agree you should stay away from specific tech stocks, consider investing in technology companies that sell products and services you actually use.

Ignore Business Case at Your Own Peril

I’ve seen too many tech stocks with growth fueled almost entirely by hype. Whether it’s because they represent a trendy industry or a potentially world-changing technology, people jump on board because they want to be a part of something exciting. The problem is that as exciting as they are, many of these tech stocks will ultimately hit a ceiling because they’re lacking either a rock solid concept or a sizable market. You should be looking for emerging companies with strong products and markets that can be measured in billions. Focusing on business case is the easiest way to ignore empty trends.

The Biggest Risk in Tech Stocks

Tech stock valuations can grow fast and then fall just as rapidly – seemingly without any warning. The reality is that in the technology world, companies can attract investors without having to show a positive cash flow or even prove there’s the potential for profit. You may find yourself trying to choose between companies without much of a track record to guide your decision-making. That can be frightening, but you can mitigate the risk that you’ll invest in tech stocks with artificially inflated valuations by doing your research. Know what you’re investing in – not just what people are saying about it.

Sell Your Losers Quickly

Given the rapid pace of technology innovation, I have found it makes sense to get rid of losers quickly. As much as you want to get back to even before you sell tech stocks that aren’t performing, resist the urge to hold onto anything that’s clearly failing. The caveat here is that tech stocks can correct with the market, resulting in a stock that’s weak for a day or two before rebounding as soon as there’s some good PR and an analyst puts it on a hot list.

What You Should Be Looking at Right Now

It’s only natural to look first at the known cash generators. Here are some of the industries I suggest you explore:

On Momentum Investing

You stand to make the most money in tech stocks associated with hot products, new services, and exciting innovations. As I say above, investing around product cycles is one way to capitalize on the increasing speed of change in the technology world. The best time to invest in tech stocks is when tech analysts first mention an exciting new opportunity or advancement by a familiar company. The fact is that high momentum stocks have higher valuations, but if you can see future potential then they’re a good bet.

The bottom line is this: while some investors will steer clear of tech stocks because they see risk, I and others can look at the same stocks and see massive profit opportunities. From the outside, it can seem irrational and utterly confusing. But technology is a pervasive force in all of our lives, and a powerful part of the modern global economy. With thorough research, expert guidance, and education, I promise you will be able to invest in tech stocks that grow your wealth rapidly without much risk.

When you’re ready to learn more about the tech stocks that represent the biggest profit opportunities, subscribe to the Nova-X Report. In each monthly Nova-X Report, I will reveal two new opportunities based on my research and tips from my network, which includes some of the most revolutionary minds in technology and tech investing.

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