In the 1980s, Nancy Reagan implored kids to “Just say no” to drugs.
Now here’s some advice for investors: Just say no to technology stocks.
Tech stocks are exciting. They’re sexy. They provide a front-row seat to the breathtaking innovations that are changing our lives in unimaginable ways.
But none of that makes them good investments. In the dozen or so years since the tech bubble burst, many investors appear to have forgotten that lesson.
Let’s look at a few recent examples:
Exhibit #1: Intel
With its dominant position in the PC market, respected brand name and growing dividend, the world’s biggest chip maker once looked like a slam-dunk for long-term investors. Then came the mobile revolution, which has largely left Intel behind. Result: The stock is down 18 per cent from where it was five years ago. Even if you include dividends, it’s down 4.4 per cent. Advanced Micro Devices has done even worse: The stock, which does not pay a dividend, is down 84.3 per cent in the past five years.
Exhibit #2: Microsoft
At one time, Mr. Softy also looked like a safe bet thanks to its stranglehold on the PC market. But even as its profits and dividends continued climbing, the stock has been treading water for more than a decade while Apple had all the fun. Yes, Microsoft is turning heads with Windows 8 and its Surface tablet, but the stock has barely budged.
Exhibit #3. Apple
Yup, Apple. Sure, some investors hit the jackpot as the shares soared with the launch of every new iPod, iPad and iPhone. But lately, the post-Steve Jobs Apple appears to be losing its polish. There were the Siri and Apple Maps embarrassments, which led to the departure of the company’s mobile software head, Scott Forstall. Apple’s retail chief, John Browett, was also shown the door after just six months on the job. Surprise: Apple doesn’t walk on water after all. Nor does its stock, which has plunged about 15 per cent from its closing high of $702.10 in September.
We haven’t even talked about Research in Motion, Nortel or Palm.
Hey, technology is wonderful. It improves countless lives and makes businesses more productive. It can also be a lot of fun. But as the above examples illustrate, the fast-paced innovation that is the lifeblood of the technology industry is precisely what makes these stocks so dangerous.
But don’t take my word for it. Here’s what Warren Buffett has to say on the subject:
“I have avoided technology sectors as an investor because in general I don’t have a solid grasp of what differentiates many technology companies. I don’t know how to spot durable competitive advantage in technology.
“To get rich, you find businesses with durable competitive advantage and you don’t overpay for them. Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy.”
True, Mr. Buffett has since changed his tune on tech, snapping up a 5.5-per-cent stake in IBM. Time will tell if this departure was a wise move for the Oracle of Omaha, or if he'll live to regret it.
READERS: Grab your smartphone, tablet, laptop, VIC-20 or whatever device you’re using, and fire back at us in the comments: Is there a tech stock that has performed consistently well over the last 10 years? Which company has that durable competitive advantage?