How to Invest in Tech Stocks

We’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,
About.com,
and the College
of Business at Illinois
.



Get All the Info You CanBefore 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
MorningstarThe
Motley Fool
InvestopediaBig
Charts
WikiWealthStock 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 DailyYahoo
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 matterhow “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

Manyinvestors 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.

– – – – – – – – – – – – – – – – – – – – – –

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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