Technology is wonderful.
But it can be mightily cruel too.
We remember the launch of the early BlackBerry [NASDAQ: BBRY] phone models in the late 1990s and early 2000s.
It was so different to everything that went before.
The shape, the screen, what you could do with it.
As we recall, it was more of a data device than a phone because you couldn’t hold it to your mouth and ear to talk. You had to use a handsfree headset.
But now, barely more than a decade after BlackBerry revolutionised the world of mobile communications, the company is about to die.
It’s a worthy reminder to investors that just because something has always ‘been around’ doesn’t mean it will always be around in the future…
As Bloomberg News reported yesterday:
‘BlackBerry Ltd., once valued at $83 billion, may be stuck with the cheapest valuation ever for a North American technology or telecommunications takeover.
‘The smartphone maker said yesterday it reached a tentative agreement for a $4.7 billion buyout by a group led by Fairfax Financial Holdings Ltd., its biggest shareholder. Including net cash, the proposal values the Waterloo, Ontario-based company at an 80 percent discount to its book value and just 0.17 times its sales, the cheapest revenue multiple on record among similar-sized North American telecommunications or technology acquisitions…‘
Technology companies can be like the proverbial Apollo V rocket launch. They can blast off in a flash, delivering investors quick and spectacular gains.
But unless the company continues to innovate, bringing new ideas and technology to the market, the gravitational forces of the free market can quickly see the stock price return to Earth…
Now, we don’t mean to scare you off technology stocks. As the editor of Revolutionary Tech Investor that’s the last thing we’d want to do.
Instead, what we want to make clear is that as an investor, technology stocks shouldn’t be an ‘either/or’ proposition. By that we mean you shouldn’t choose between tech stocks or bank stocks, or tech stocks and retail stocks, or tech stocks and industrial stocks.
Generally speaking, tech stocks should be part of your speculative portfolio. So in the same way you’d never choose between a blue-chip banking stock and a tiny mining penny stock, you shouldn’t choose between a blue-chip banking stock and a speculative technology stock – even if that speculative technology stock is a multi-billion-dollar company.
So why is that?
Aside from the obvious, that tech stocks are riskier than banking stocks, you tend to get more accelerated price action with tech stocks. That’s what causes them to shoot up so fast.
Because technology stocks are innovative, investors tend to build all future growth potential into the stock price. When a tech stock unveils a new product or process, investors don’t think ‘Oh that should help businesses achieve a 1% improvement in productivity.’
No, investors think, ‘Wow! That will revolutionise the world.’
And so you get this kind of price action…
Remember what we said. Tech stocks tend to explode onto the scene. And you shouldn’t confuse a tech stock with a standard blue-chip stock.
Here’s a chart of the BlackBerry share price going back to February 1999:
You’re probably looking at the blue line. If you bought BlackBerry (or Research in Motion as the company was then called) shares in 1999, you could have clocked up more than a 12,000% gain in eight years.
But if you had held on until today, you would have gained just 379%…which still isn’t bad.
But now look at something else. Look at the red line at the bottom of the chart. Compared with BlackBerry the red line barely budges from the bottom of the scale. That’s how it appears anyway. In reality, those shares have gained 177.7% over the same timeframe.
Those are shares of Commonwealth Bank of Australia [ASX: CBA]. Here’s the thing, if you bought and held on to CBA shares over that time you would have picked up $33.47 in dividends. So inclusive of dividends your return would have been a 306.9% gain – not far behind the ‘buy-and-hold’ gain of BlackBerry.
So, what are we saying?
The important message is that you should buy and hold some stocks, but other stocks you shouldn’t.
The comparison between CBA and BlackBerry is a perfect example. It’s why we recommend you hold reliable dividend-payers in your portfolio. This is the part of your portfolio you can afford to buy and then set to one side.
With any luck you’ll never have to do anything with them again…except cash the dividend cheques.
Speculative stocks on the other hand are completely different. We know it’s hindsight investing, but it’s clear BlackBerry wasn’t the type of stock to buy and hold.
And as Sam Volkering pointed out last week with his essay on Apple [NASDAQ: AAPL], odds are that Apple isn’t a stock you want to have lingering around in your portfolio for the long term either.
This is why in Revolutionary Tech Investor we see our tech and biotech stock picks as short-term punts. And the last thing we’d recommend is for investors to see these stocks as an alternative to a reliable dividend-paying stock.
This is super important when it comes to building or rebalancing your portfolio.
You have to know exactly where a stock fits within your portfolio. You can’t have all safe dividend payers because odds are you won’t achieve your investing goals.
But you can’t stack your portfolio with only high-risk growth stocks either, otherwise you’ll find your portfolio crashing and burning all over the place.
The key is to lay the foundations with a handful of quality and reliable dividend stocks, and then supplementing this with a number of volatile speculations to help boost your returns.
Tech stocks are some of the most exciting companies you can invest in. It’s what makes it so enjoyable to write about them every week in Revolutionary Tech Investor. But make sure you understand their role in building your wealth – the goal is to buy, make quick and spectacular gains… and then get the heck out of there.
Cheers,
Kris+
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