I work in the tech industry and have always been fascinated by technology and the role it is playing in improving our lives (definitely mine – cannot think of life without broadband, internet, e-mail, google etc).
Back in 2000, during the tech bubble, like others I got swept by the internet and technology mania and went ahead in invested in technology stocks. The basic logic of my analysis was correct, but I got the valuation wrong (overpaid for the optimism). After promptly losing money and later reading munger and buffett’s thoughts on technology, I have changed my approach to technology.
I am by no means a techno-phobe. I spend time reading tech blogs, looking and trying to understand changes happening in technology and how it seems to be impacting various businesses such as newspapers, media, advertising etc. But it is diffcult to realistically forecast a technology business out for several years. It is more so for technology businesses as valuations of most of these companies is high and to make any money, one has to be able to forecast the cash flows for 5 years or more.
Over time based on what I read and based on my experience, I now prefer companies which are predictable than which will have the highest growth. My own experience has been that markets tend to pay more for growth than predictability ( FMCG v/s IT services stock ?)
At the same time the decision to invest in tech stocks also boils down to one’s investing philosophy. I have tend to have a focussed portfolio with a few names and want to hold for 3-5 years with low maintenance (quarter or annual followup). As a result it is difficult for me to hold technology stocks as it requires too much effort to follow them.
As an aside I work in IT services. So my professional career is tied to the Tech industry. The last thing I want to do is put all my eggs in the same basket. That is not the typical way of looking at diversification. But for me the income stream through my career and my stock portfolio need to diversified sufficiently. Who wants to be lose a job and also see the stock portfolio crash at the same time, because the industry hit a roadblock !!
My thoughts exactly. I also work in the tech industry but find it very difficult to value tech stocks. The only criteria that i can think of for valuation of a tech company (apart from it’s financials) is to look at the quality of its management. Still, this is an insufficient yardstick as far as i’m concerned. Another way to play the tech story is to look at opportunities for an upside of a stock as a take over candidate (Oracle’s acquistion of I-Flex for example). But these are few and difficult to predict. One stock i’m watching closely is that of Mphasis which may fall into this category – there are rumours of EDS being interested. More than anything else, i also like the management – Jerry Rao is a terrific guy.
I work in technology too. I think technology business in general is good businesses, but often the valuations are not right or rather they seem not right cause of various reasons (Either on pure P/E basis or inability to predict the cash flow). In technology, there exist lot of competition without much really product differentiation (I don’t see myself really being swayed over choosing a software product because of its quality, I guess the brand effect is hardly there for mindshare, but a big name is matter of survival) or service differentiation (what is difference in it what Accenture or Infosys or Tata consultancy really have in market, other than competing on price).What we do know is technology will be there and it’s great for society, but very few investment opportunities.Also technology is exciting and therefore attracts lots of smart people who figure out to do the same thing better which kill any completive advantage as much as what it is really perceived to be.But the above is more so true for software, I believe.I wonder when it comes to technology of medical systems, or anything other than software of hardware, where propriety knowledge really becomes edge and fends of lot of competition could get be good investment opportunity as cash flow prediction becomes easier
very apt comments from both of you.i agree that lumping all kinds of industries which have varying use of technology into once buckets is not very smart.My reference to technology is more towards IT services, Hardware and software (products) kind of companies.Even in the above group the IT services / BPO kind of companies are more of labor arbitrage than anything else. I agree quite a few of these companies are good businesses with good returns on capital and may have resonable competitive advantage. But the price is too optimisitic.However some of the tech companies (in my opinion) are sink holes. Moser baer comes to mind. It consumes a lot of capital, is into commodity product and its depreciation is way below the obselence of the assets.However i agree that some other companies like pharma which use technology in a different manner are not same as the above kind of companiesFrankly , my approach is to look for 1 foot jumps (using buffet’s quote) rather than 7 footers.
I am thinking contrary to what you are saying. I was initially pessimist about IT indusry (in 2001-2)(when I didnt knew much about hte industry and while I was working there!).My pessimism on Tech industry (as an investor) was due to the fact that i considered IT projects as not recurring events(and hence revenue from them is one-time) (This view came from my small stay with Infosys, where clients worked on short term projects).Now, I think and as Gatner and few leaders I have interacted from mktg side says this is a service based revenue, and is irreversible in nature. Biz once flown to India is hard to move back to US or to any other competing country. Moreover indian-skill story seems credible and the way IT cos have gained mass over yrs is also worth considering.So if you start looking at Infosys and Wipros as a software-“BPO”-unit (and not prod cos), then the revenue streams look recurring and robust. Hence probability that they will close down or reverse is thin. I agree what u say on Moser. (i wonder why smart asses like ChrysCapital has gotton into it!)As to ur not investing in IT — My analysis of business economics suggest that in any growing industry, its the shareholders who GAIN the most, and its the employees who lose (or dont gain much). If infosys got to grow from 2bn to 2.5bn, then it will ADD more employees and not give more work (and pay) to the exisiting employees. Hence its better to disconnect one-as-an-investor and one-as-an-employee, and better to be a partner in a growing industry (provided decent valuations are available).
i agree with you and i am not a pessimist on the IT industry. its just that i am pessimist on the stocks at these valuations