posted by Howard Fosdick on Tue 8th Nov 2011 02:17 UTC
IconWe've all had the idea, even if we've never pursued it. We just know we could make money in the stock market, based on our tech knowledge. We live and breathe tech. Why not profit from it?

This article tells where to start. First, a big disclaimer. You may be able to use your knowledge of the tech industry to prosper in the stock market -- but only if you do some careful research. Investing risks your money!If you don't do your homework, you're just trusting to luck. Here's where to start ...

Start Small

New to investing? Treat it just like a new programming project. Start small. Minimize your risk. Learn as you go. If you really have valuable insights you can profit from them just as well when you know a lot more, rather than taking big risks before you've educated yourself. Start with the free investing tutorials at Investopedia,, and the College of Business at Illinois.

Get All the Info You Can ... Before You Invest

It's amazing but true. People will pump thousands of dollars into a stock they've spent less time researching than the computer they buy for $500. Which risks more?

If you invest in stocks you'll be competing with full-time money managers with big research staffs and lots of resources. Don't treat it casually unless that's how you always treat your money. Combine in-depth research with your tech knowledge for the best chance of profits.

These websites provide investing information and stock research:

---Stock Research Sites---

Yahoo Finance Stock Research SmartMoney
Morningstar The Motley Fool
Investopedia Big Charts
Stock Consultant

You can pay for online services like Motley Fool Premium Advice and Morningstar Premium Membership but I'm not sure they're worth it given all the information available freely on the web. On the other hand, if a couple hundred dollar per year subscription helps you make a single better investment decision, it might pay for itself.

Forums offer interaction with fellow investors. Remember that you'll run into everybody, from experts to trolls. And lots of front-runners (people who try to convince you to buy a stock after they've bought it, to run up the price):

---Investing Forums---
Motley Fool boards Market Thoughts
Investor's Business Daily Yahoo Answers
Bogleheads  mutual fund orientation) Morningstar Forums
AI Stock Market (applies AI techniques)
Online Traders Forum

Read Annual Reports ... and Financials

You don't invest in a product, you invest in a company. Technical knowledge alone is not enough for successful investing. Every publicly-held company is required to file an annual report. Since these reports are legally required to contain certain information -- like competitive threats, company finances, and stock risks -- they're a fantastic source of information. If you haven't read the annual report prior to investing in a company, you haven't done your homework.

Before you invest in a company you must analyze its "financials," its financial statistics. You need to understand statistics like forward P/E, TTM P/E, yield, PEG, p/s, p/b, cash flow, debt, ROE, debt-to-equity, market cap, and a lot more.

For example, check out the Morningstar financials for Microsoft Corporation:
If you aren't comfortable reading these financials, you must learn. Start here, here, and here.

Don't Substitute Tech Bigotry for Judgment

Some techies make the mistake of thinking that since they love a particular technology, everybody will. You must do your homework and then objectively weigh what you've learned against your tech knowledge.

I have a friend who believed Linux would take over the personal computer market because he hated Microsoft. Though he was fervently convinced of his views, computer purchasers disagreed. With stocks you're predicting what others will buy. Just because you hold a particular view doesn't mean that everyone else will. No matter how "right" you may be.

Remember, too, that the best product doesn't always win in the marketplace. Other factors are at play.

Don't let emotion drive your investing. Emotions come into play as you face profits or losses. Base your buys and sells on facts, knowledge, and research.

Gains and Losses are Relative

To say you made money on a stock means little. Perhaps if you had invested that money elsewhere you would have made more. The same goes for losses. Whatever you make or lose is relative to alternative investments you might have bought instead. So you need to track how well you do as an investor. Then compare your track record to prominent benchmarks like the S&P 500 or Nasdaq. Or to a tech stock benchmark like the Dow Jones US Technology Index (DJUSTC).

After the 2008 financial collapse, I had a friend who was furious at his mutual fund because it declined 25% . If he understood investing better, he would have been happy. The average decline for his fund type during that period was about 40%. You get the idea.

Another point about gains and losses: If your stock goes down 10%, it has to go back up more than 10% for you to break even. For example, say your stock is worth $100. It goes down 10% so you now have $90. Then it goes back up 10%. You end up with $99 (not $100). Keep this in mind if you measure your results by percentage gains and losses. And don't forget to subtract trading costs from your numbers!

The Larger Market Overshadows Everything

Many investors learned this one the hard way during the dot com stock collapse in 2000-2001. You may have made the smartest tech investing decision ever, but if the market as a whole turns south, your stock likely will too. Very, very few stocks successfully fight an overall market decline.

Consider your investing time horizon. If the market goes down and drags your tech stock with it, can you wait long enough for the market to trend up again? Can your company survive the downturn? Profitable investing means thinking about much more than one company. You've got to consider the market as a whole (what investors call the macro-economic factors). For example, it took years for Oracle's stock to recover from the dot-com bubble collapse. Even though Oracle Corp had done nothing wrong. Simply making a good bet on Oracle would not have been enough to profit during that timeframe. You had to account for the overall market direction, too.

Another example: in 1997 southeast Asian stock markets collapsed. Oracle stock dived by a third in response. But Oracle Corp only made a small percent of their profits in SE Asia. As they often do, the markets over-reacted and unduly punished a stock. If you were savvy enough to spot this over-reaction and bought Oracle right after the 1997 debacle, you made a big profit in a year or two. The key was the ability to follow one stock and map its movement onto overall macro-economic conditions.

Buy Low, Sell High

This simple rule is as basic as it gets. Yet people violate it all the time. It's easy to buy a stock when it's up because this generates lots of media attention. But you have to make sure you buy at a lower point than you sell -- which is hard to do if you bought a stock after everyone got excited about its rise. Momentum investors buy a stock while it's rising and then sell it near its market top. I prefer a value approach, looking for an unfairly beaten-down stock and profiting by its comeback (like Oracle in 1997). Others like growth stocks -- companies that create value through their growing sales and earnings, like Google and Amazon.

Whatever approach you choose, you only make money if you sell a stock for more than you paid for it. The one exception might be if you make enough in dividends (money companies pay to their shareholders out of their profits). Tech stocks that are in their growth phase typically pay no dividends -- eg, Apple, Google, and Amazon. More mature tech stocks pay quarterly dividends -- eg, Microsoft, Intel, and IBM.

Have a Sell Discipline

Knowing when to sell is as important as knowing what to buy and when.  This can be hard when your stock is down, because all of us find it hard to admit a mistake. Nobody wants to sell a loser they were sure was a winner. Some people even "double down" and buy more of a favorite stock while it declines. Should the stock continue declining, you've now doubled your losses! Decide when and under what conditions you'll sell ... even before you buy.

Contrarians Make Money

Many investors do their homework but follow the herd. In investing you have to anticipate where the herd will go next. Often this means going against the conventional wisdom -- buying a stock that's at a low while everyone beats up on it, or betting on a new venture everyone else thinks will fail. You have to have real go-it-alone guts to make money on stocks. It's the contrarians who are right who make money.

Don't Invest In Your Employer

Remember the Enron scandal? Lots of unlucky Enron employees lost both their job and their retirement investments when Enron collapsed. Diversify. Don't invest in the stock of the company you work for. The exception might be if your company's stock investment plan matches your monies to counter-balance the risk. Just consider the risk before you leap.

Understand Taxes

The true measure of what you make from your investments is an after-tax number. Before you invest, you should understand long- versus short- term capital gains, how to balance gains with losses, the wash rules, qualified versus unqualified dividends, how the foreign tax credit affects dividend income, and more. Tax tutorials to get you started are here, here, and here.

Start Smarter Than Me

Like many techies I started out investing based on personal insights and co-workers' advice. Only over time did I learn some of the basic lessons in this article. I hope they prove useful to you. There's lots more to say on the subject, so please add your own tech investing tips with comments.

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Howard Fosdick (President, FCI) supports databases and operating systems. He's had to learn about investing because as an independent consultant he doesn't have a corporate savings or retirement plan. Read his other articles here or email him at contactfci at the domain name of sbcglobal (period) net.

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