- The newest ways to invest in Internet stocks
- Recent biotech developments and their effect on the market
- Latest trends in high-tech consumer products
Updated and revised for the Third Edition, this national bestseller shows you how investing in high-tech can make you richeven if you don't understand the technology.
How do you find the next Cisco or Intel? How can you avoid losing your shirt on start-up companies that suddenly fizzle and die? And how can techies and non-techies alike get the edge on Wall Street's booming high-technology sector?
Whether the stock market is enjoying an explosive bull run or retreating in the face of a possible bear market, the world of high-tech has become the most important investment opportunity of our time. Now, in this latest revised edition of Every Investor's Guide to High-Tech Stocks and Mutual Funds, Michael Murphy shows that you don't have to be an engineer or research scientist to do well in technology stocks. From software to communications to biotech, Every Investor's Guide to High-Tech Stocks and Mutual Funds provides refreshingly clear, jargon-free analysis of the eight key technology industries, sharing coveted insider tips and wisdom that will supercharge your portfolio's results.
Every Investor's Guide to High-Tech Stocks and Mutual Funds quickly established itself as the definitive book on high-tech stocks when it was first released in the fall of 1997. In this fully updated Third Edition, Murphy provides information on the newest ways to invest in Internet stocks, recent biotech developmentsand their effect on the market, and the latest trends in high-tech consumer products. Also included is a revised and updated list of the author's predicted blue chips of 2010.
Focusing on long-term investment strategiesincluding the easy-to-use Growth-Flow strategy that has made Murphy's California Technology Stock Letter one of the top-rated investment publications in the worldMurphy answers frequently asked questions and guides readers through the dos and don'ts of putting your money into high-tech. Got the inside scoop on an upstart software company or a great no-load fund that has skyrocketed in the past six months? Murphy shows you how to evaluate opportunities, decipher industry hype, and pick your shots with care. Unsure if you should heed the experts' warnings about the economy and the oncoming investment slump? Murphy offers surefire techniques for knowing when to investand when to get out. Simply trying to fund a comfortable retirement? Murphy examines a variety of stock and mutual fund options, and helps you assess which ones best suit your needs.
Whether you're investing in blue chip stocks or convertible bonds, this groundbreaking book provides essential information on how to build a technology portfolio, how to calculate the downside risk of any investment, and how to apply Murphy's unique, proven Growth-Flow model to maximize your returns. With detailed company profiles, stock performance records, and contact information for thirty of the best technology mutual funds, as well as forecasts for the next five years, Every Investor's Guide to High-Tech Stocks and Mutual Funds arms individual investors with everything they need to cash in on the current technology boom and beat the Dow in the stock market's hottest sector.
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About the Author
Read an Excerpt
Why Buy Technology?
Economies usually evolve slowly, but from time to time they go through a rapid, wrenching change that creates massive new opportunities at the same time that old structures are destroyed. Each of these revolutions is caused by the emergence of a new underlying economic driver and brings with it new infrastructures that change society. We are living through one of those major changes right now, and it is creating once-in-a-lifetime opportunities to build new wealth.
When you are living through it, it can be hard to put it in perspective. But ten thousand years back, your great-great-great-great-granddaddy was a hunter-gatherer. The economic driver was meat protein. Always on the move, taking food and shelter as it came along, he rarely deferred current consumption to make investments that would pay off in the future.
Not that there were many investment choices. Great-granddaddy and his mate may have smoked or salted meat to save for the winter, but that was pretty much the limit of their ability to invest for the future. They didn't build wealth, and there wasn't much of an infrastructure--animal trails through the woods were about it.
Then--paradigm shift!--life evolved to an agrarian society where your great-grandparents8 farmed the land, saved seeds for next year's crop, developed water systems, and built houses. Towns grew up to market crops and provide a center to buy supplies. The agrarian society lasted for thousands of years--until three hundred years ago, give or take.
What drove wealth building in this new society was land and crops. If you owned land, you were wealthy. If not, not. Theenabling technology was pretty much hand tools and horses. The infrastructure was dirt roads and couriers on horseback.
The United States was discovered and settled toward the end of this period. Having a limitless supply of land, lots of water, and not many regulations, the pioneers grew great wealth rapidly. (Hong Kong did the same thing over the last fifty years on only 400 square miles, so we know that land isn't the issue anymore.)
Then came the industrial revolution, driven by cheap steel and a flood of new inventions. Wealth grew in steel, industrial machinery, coal, and transportation. The infrastructure changed to railroads, shipping, and the telegraph. The important economic indicators changed to coal, iron and steel production, patent applications, and railroad operating income.
Great family fortunes were built in these new areas; names we still know like Morgan, Bessemer, Vanderbilt, Astor. Although investors still could make money buying and selling in the agrarian economy, it was much easier to get the wind at their backs investing in the new areas, side by side with the entrepreneurs.
But they weren't dubbed "entrepreneurs" in those days. They were called "robber barons."
After World War I, the United States and most of the developed world shifted to mass production and consumer-based economies, thanks, in some measure, to Henry Ford. The economic driver changed to cheap energy--especially oil. The middle class grew faster, with enough income and an enabling technology (the automobile) to move out of the noisy, polluted cities. They did not have to live within walking distance of the factory anymore.
The growth industries changed to autos, housing, and retailing. The infrastructure changed to highways, airports, telephones, and broadcasting. The important economic indicators changed to retail sales, auto sales, housing starts, and capacity utilization.
Again the great new family fortunes were built in these areas. The automobile families were the royalty of the Midwest; home building created numerous multimillionaires after World War II. The Walton (WalMart) success story may be the last example of that era. Again, investors earned the highest returns by focusing on the rapid growth areas in the new economy.
Then came the technology economy.
Like all generalizations, it's easy to argue about when the Digital Age began. Mainframe computers went commercial in the 1950s; Digital Equipment Corporation was founded in 1957. But it was the demands of the Department of Defense plus NASA that drove the process of miniaturization to the point where Fairchild invented semiconductors. And Intel, descendant of Fairchild, gave birth to the microprocessor in 1971.
Microprocessors powered the digital watches and hand-held calculators of the mid-1970s. By the late 1970s, personal computers were spreading by the tens of thousands. Apple computers could even be seen on the desks of non-wonks in ordinary companies.
But this was not yet the Age of Empowerment where anyone could own a personal computer for less than $5,000 and make it do useful things. It took IBM to put the Good Housekeeping seal of approval on personal computers by coming out with its own in 1981, clearly marking the latest change in the economy.
Now there's no question: this is the technology economy, and the economic driver is ever-cheaper semiconductors. Underlying all the advances in computing and communications are unbelievable price drops in semiconductor chips. Gordon Moore, the founder of Intel, propounded Moore's Law twenty years ago:
The Cost of Making a Semiconductor Drops 50 Percent Every Eighteen Months
He's been right thus far, and we expect his law will continue to hold true for the next ten years at least, at which time the physical limitations of silicon may force a rethinking of the whole technology. But you never know. Ten years ago, it was thought that microprocessors could never go faster than 100 megahertz. Now you can buy 300 megahertz Intel processors, and people are waiting impatiently for 500 megahertz.
The growth industries in the new economy are computers, software, semiconductors, communications, and medical technology, and the infrastructure is changing to satellites, fiber optics, networks, and wireless connectivity. Again, the great new family fortunes are being built in these areas--just ask Bill Gates, or Jim Clark of Netscape.
So how do we measure this?
Of course, the relevant economic indicators have changed again. It's just that the government and the media haven't quite figured it out.
We still get ten-day auto-sales figures; where are ten-day computer sales figures?
Why don't we hear about the high-tech trade balance (which shows a multibillion-dollar surplus)?
How about knowledge-intensive employment, which grew rapidly through the last recession and continues to show little unemployment? Of the U.S. regions with the fastest job growth in the early 1990s, San Jose and San Francisco (at either end of Silicon Valley) were first and third.
How about the deflation in high-tech prices, which drop reliably every year? One hundred megabytes of hard-disk-drive storage cost $250 in 1988, $50 in 1993, and $12 in 1998.
Year after year, technology companies grow about 20 percent with no inflation, while the rest of the economy plods along at 2 percent to 3 percent real growth. Although technology started as a small, specialized part of the economy in the 1970s, after several years of rapid relative growth, the new technology economy accounts for roughly 15 percent of the total economy.
Well, 15 percent times 20 percent is 3 percent growth. That's real GDP growth of 3 percent per year from the technology sector alone, no matter what the Federal Reserve Board does.
Yet, for the last several years, the Fed, in its wisdom, will not allow the total economy to grow faster than 3 percent. That means the acceptable growth rate for the entire nontechnology economy is 0 percent. Worse, the mass-production and consumer economy is saddled with debt, running a huge trade deficit in oil and automobiles, and suffering low growth due to the demographics of aging baby boomers. No wonder people are feeling financially stressed!
In this foot-on-the-brake environment, investors should be bailing out of the old mass-production economy, not to mention the even older industrial economy. (The latter is extremely vulnerable to foreign competition from the newly industrializing countries.) There should be a rush to align investment capital with the new entrepreneurial areas--especially in the United States. Except for robotics, where Japan is first, the United States dominates the new technology economy. Seven of the top ten personal-computer manufacturers are U.S. companies, including all of the top four. Now that technology markets have expanded to include consumers as well as corporations and the entire world instead of just the United States, Europe and Japan, U.S. dominance of most technology industries is likely to produce domestic wealth comparable to Britain's in the industrial revolution of the 1800s. Judging by the performance of technology stocks over the last several years, many investors already have begun switching their investments from the old economy to the new one.
Why, then, do more than 90 percent of Wall Street analysts follow the old-economy industries? Of nearly 9,000 mutual funds, why are only about 50 classified as science and technology? With the tremendous demand for data storage, why does Seagate Technology sell for less than half the average price/earnings multiple?
Several years from now, all this will be different. There will be hundreds of technology mutual funds, serviced by hundreds of Wall Street analysts retreaded from old-economy industries. Intel will be in the Dow Jones Industrial Average, as will Microsoft. Investors may even be focused on the real driver for long-term technology profits--the research-and-development programs that create future earnings.
Why is R&D such a powerful economic driver? Information and knowledge are the essence of any economy. In the agrarian economy, knowledge was passed along orally and recorded in a few books and journals. The industrial and mass-production economies added blueprints, magazines, newspapers, and inexpensive books. In a technology economy, information is also captured in databases that reflect the experience and know-how of millions of people, networked to the data and to each other. The knowledge explosion is both the cause and the effect of technological progress.
Information gets into the economy primarily by lowering costs. Real costs always fall. That is, adjusted for inflation, the real cost of creating something is under constant competitive pressure. This is the definition of productivity, and the direct cause of an increasing standard of living.
"Learning-curve" economics is best illustrated by the semiconductor industry. Since 1970, the cost of manufacturing one bit of random access memory fell 28 percent per year. By increasing wafer sizes, shrinking transistor sizes, and improving production equipment continually, semiconductor companies make the same profit margin today they did over twenty years ago--on much larger sales. Now the cost of memory is so low that demand has exploded and it is used to improve hundreds of low-priced, ordinary consumer goods.
No companies are more leveraged to the knowledge explosion than technology companies, which use technical information to create information-processing products, then reinvest 5 percent to 25 percent of sales in R&D to create new information. This is the source of dynamic growth that you should seek as a technology investor. These companies often have to educate their customers on how to use information in order to create a demand for technology products. They almost always have to demonstrate an attractive return on investment to get the customer to sign on the dotted line, so every time they can cut the price (reduce the investment) it becomes easier to sell the product to a larger potential audience.
The fastest-evolving, most prolific corner of capitalism is technology. The nontechnology U.S. economy has settled into a mediocre 2.0 percent to 3.0 percent growth rate. As the 78 million baby boomers age, they spend less on the major family-establishing expenses of their thirties: houses, cars, kids, educations. They save more and provide less push for growth. The consumer is still burdened with debt; commercial real estate prices remain depressed; the federal government seems constitutionally unable to balance its budget. The old mass-production economy is in trouble.
In a relatively slow-growth U.S. economy, it will not take technology long to become the largest, most important sector. If the old economy grows 2 percent a year while the new economy continues to grow at 20 percent a year, within seven years the new economy will be over one-third of the total, and within eleven years over one-half.
Year Technology Nontechnology
1997 15.0% 85.0%
1998 17.2 82.8
1999 19.6 80.4
2000 22.3 77.7
2001 25.3 74.7
2002 28.5 71.5
2003 31.9 68.1
2004 35.5 64.5
2005 39.3 60.7
2006 43.2 56.8
2007 47.3 52.7
2008 51.3 48.7
That's why we always rejected Peter Lynch's dictum that you can't invest in things you don't easily understand; that's a bus ticket up a dead-end road. Virtually all the net growth in the economy will come from technology: electronics technology, entertainment technology, communications technology, technology exports, new medical technology, and biotechnology drugs. Investors in technology are buying into inevitably superior long-term performance. The table above shows why the opportunity needs to be seized now, while this huge transition is happening.
In addition to the steady trend to lower costs, there are long waves in economic history with rising rates of growth for roughly a quarter-century followed by falling rates of growth for roughly a quarter-century. The economy expanded rapidly from the early 1900s through 1929. It then contracted until the artificial stimulus of World War II cut the down cycle short in 1942, although the consumer economy remained depressed for another four years. The post-World War II expansion peaked in 1969, followed by twenty-two years of difficulties including corporate restructurings in most old-economy industries and outright depressions in energy, commercial real estate, and the savings and loans. In the early 1990s, the U.S. economy began a rising phase that will cause the economy to boom for two or three decades.
At the same time, we are in one of the occasional periods of a high rate of technological change. The economy is adapting to new technologies, new consumer demands, new cost structures, and new educational needs. Retraining workers is a battle cry. The combination of a rising long wave of growth and a high rate of technological change will be a radical economic and social transformation, providing extraordinary investment opportunities.
The fall of communism added over two billion people to the world's labor and consumer force. The internationalization of the world economy will intensify competition, forcing all companies to use the latest technology. Thus, high rates of economic growth will have a worldwide effect.
Technology companies tend to sell worldwide, with 20 percent to 70 percent of sales overseas. No matter how fast the United States grows, we can be sure that Latin America and the industrializing Far East will grow faster. Europe may struggle with lower growth due to its high-cost social-welfare economies, and Japan may be fighting a depression for many years. But most of the world is a wonderful market for U.S. exporters; first among them are the technology companies.
If you want the investment winds at your back, you must invest in technology. The old days of "growth" by raising prices are over. Technology companies cut prices every year; technology managements know how to manage for growth in a deflation--they've never known any other environment. These are the managers for the twenty-first century.
Investors who are clever at buying low and selling high can still make money investing in the old cyclical consumer economy, outguessing all the other analysts and portfolio managers looking at the same dumb lists of comfortably familiar names. With luck, they might achieve the 10 percent long-term average equity return, even if the broad market does somewhat worse than that for a while.
But we'll take companies growing 15 percent to 50 percent a year with no debt, shipping 20 percent to 70 percent of their products overseas, investing 7 percent to 20 percent of sales in R&D to invent new products that create sales growth and carry high profit margins to boot. We suspect that more and more investors will join us as massive amounts of money come out of the mass-production economy and the even older industrial economy into the technology economy in search of higher growth and a better return on investment.
During the next six years, the cost of computing will fall by 90 percent. The personal-computer market will nearly triple. The communications business will increase by a factor of five. There will be at least 2,000 percent growth in Internet accounts. Almost 200 biotechnology drugs will be approved by the Food and Drug Administration, many to treat previously untreatable chronic diseases of aging that cost the health-care system billions of dollars every year. It is indeed the best of times to be a technology investor.