Monday, November 4, 2013

Invest in Tech

Our first how to invest post featured a conservatively managed community bank holding company. Our second investment post recounted an ultimately successful speculative investment in a small community bank that had been on the ropes during the financial meltdown. Now we turn to tech.  

To begin, here are the fruits of our most successful foray into tech.

Arlington home addition, clockwise l to r, family room/kitchen, outside rear view (green siding), "Roman" bath, and grand size master bedroom with walkout porch, two sink with jacuzzi full bath (not shown) and walk in closet (not shown).

These are pictures of the addition to our former Arlington house. We owned a solidly built, finely crafted, pre-WW II built home, in a prime inside the DC Beltway location. However, it had but two bedrooms, a single bath, and a tiny galley kitchen that you couldn't swing a cat in. To house our growing family the home needed to grow. We hired Andy to about double the size of the house, financed not by loans from our Federal Credit Union, the Bank of American or BB&T, but by the sale of our Nokia and Qualcom stock. 

Saving and investing is not a board game; it is about what they can do for you and your family and your security and future. Preserving and then growing your assets improves quality of life, keeps you off the dole and funds retirement. We saved diligently and worked investments as if it were our second or third job, because it actually was.  

Here is how our tech investment decision making worked.

We understood that technology constantly evolves. We learned to look for and be attentive to what and how. To take advantage of tech from an investment perspective, the best returns are earned by getting in on the ground floor of a new wave of technology and to get out when the investment becomes red hot. Seldom are tech investments long term buy and holds -- more like buy, sell, buy again after the bubble deflates and then hold. Momentum usually pushes tech stocks beyond their long run stable price curve.

In looking at prospects for investment in tech, or most any other sector, look for suppliers, especially bottleneck or monopoly suppliers if they exist. There is a better chance early on to buy value with with the lesser known upstream providers, plus, as a general rule, the further upstream you get from retail the less competitive (and more profitable) is the business environment.

Through my work in the mid 1980s I came to know well a fellow who worked for (and became a partner of) the consulting arm of Price Waterhouse (ultimately spun off and absorbed by IBM). We spoke not only about the work he and PW was doing for my employer, but of our other projects and endeavors as well. This was when there were things called radio phones and mobile phones -- relatively few in number and very expensive to buy and use. Cell phone technology was just emerging. 

My consultant friend worked on engagements for clients who were gauging applications for and purchases of bandwidth in the first set aside of cell phone radio frequency spectrum. He educated me on the technology and the software that transferred calls from cell to cell as callers moved about. Cell phone service was a novel and innovative concept that would dramatically expand the range, capacity and reliability of wireless phone service. We could see that the cell phone industry, once it became established, would experience enormous growth.

In the 1990's, when the cell phone industry was still young, three sector investment opportunities presented themselves. This was a critical point when the initial roll out of analog cell phone service was beginning to be replaced by higher quality digital communications with virtually unlimited potential for additional (beyond voice) features. First there was Sprint (S), which was a leading and rapidly growing cell phone service provider.

Second was Nokia (NOK), which was one of the two leading cell phone handset manufacturers. Nokia's revenues would surge from overall market growth and upgraded handsets. And third, was Qualcom (QCOM), a designer and purveyor of chips installed in cell phone handsets, and importantly, the developer of a patented digital communications protocol that (at the time) might be (and eventually was) adopted by the industry. The potential for grabbing revenue from every new cell phone made Qualcom an ideal investment candidate.

Sprint was in my disfavored retail class -- we took a pass. As for the others, some of the details have become hazy as the years passed, but QCOM for us was a $2 or $3 dollar a share purchase. We remember calling our full-service broker the day that it reached $100 a share, telling him to sell, sell, sell at the peak of the internet bubble. He talked us out of it. The story was similar, but the returns less for Nokia. Ultimately we sold QCOM for $40 to $50 a share, and Nokia for a very substantial profit as well to finance our big home addition. We also dumped our full-service broker/adviser in favor of an independent model where we managed our own discount brokerage account. We moved forward and haven't looked back since except to document how far we have come.

We have had other forays into tech but none nearly so successful. Part of the problem I realized is that I'm not so young anymore and in tune with what is new and promising, so I miss waves until they are pretty well formed. There came a time when we invested in Garmin (GRMN) but by that point its GPS devices had become relatively common.  We missed the first wave and got out after earning modest gains when we realized that GPS would was being commoditized via insertion into other devices such as cell phones. We bought Microsoft a few years back, and dumped it because it seemed to be going nowhere. It appeared to us that MFST was being managed more for the benefit of its executives and employees than of its stockholders. We bought Apple (AAPL) at $90 and sold it at $110, not understanding the waves of innovation that would follow and the almost religious devotion of its youthful customer base. We bought Apple again more recently about 30 percent below its $700 a share peak, which it turned out was about 15 percent above the bottom. AAPL stock has bounced back and then some, but our profit is nothing to brag about. 

Our most recent tech investment is Facebook (FB). We thought the IPO excessively hyped and overpriced but we as Facebook users could see how advertising could be increasingly integrated into the product and drive large revenue growth. We were fortunate enough to catch the stock very near the bottom, buying our position for between $19 and $20 per share (by looking at the stock prices variations day after day we sensed $20 or thereabouts was the price floor). We've held on because we think Facebook has legs for some years to come, though certainly there will be dips along the way. It's a carefully managed company that constantly keeps one eye on its user base and another eye on its advertisers. Time will tell how that works out -- tick tock.    


  1. Why are you not identifying short sale candidates? Given your doomsday scenarios, this would only make sense

  2. Meltdown and doomsday scenarios are systemic -- ultra-short ETFs like SKF, DXD, SRS, FXP, DUG, SRS and REW will do (there are dozens now, I haven't reviewed to see what the new ones are). Most investors don't have margin accounts. For those and the many investors who have all or a majority of their equity assets in retirement accounts, inverse ETF's are the only feasible way to play the short side.