Technology stocks are almost irresistible to many investors and rash decisions often lead to heartbreak.
If you are in the market for a new investment particularly in the technology sector, you would do well to ask yourself if the company:
- Solves a particular problem for its customers
- Meets a need that is currently not met or not met well
- Creates a need where one did not exist before
There are many technology companies to consider when looking for a new investment however if you want to minimize your risk focus on companies that deal in real world problems and solutions.
Of course a solution to a problem is of no value if there is not a clear delivery mechanism.
This means solutions must be readily identifiable by the potential customer.
For example, IBM has all of these qualities and a brand that is one of the best known and respected in the world.
They can deliver enterprise software and hardware solutions and back it up with support. These are obviously big-ticket items, but they deliver a total solution to customer problems.
That solution and the reputation for service behind it is what makes IBM a continued leader in this technology segment.
I'm not saying you should buy IBM stock. That is a decision you have to make based on a number of other factors, including the current stock price (is it under or over priced at the moment).
Google helps people find information and while most consumers know it as a search engine the company also makes hardware and software. Its search capabilities go far beyond what's on your computer and are used by companies to search their own websites.
In both cases companies solve problems and meet needs that help companies and consumers work better and more efficiently
Like IBM, I'm not recommending you buy Google stock.
It may be hard but not impossible to identify the next IBM or Google.
There are many companies that are way beyond start up phase that long-term investors can analyze with some confidence.
There is no doubt that there are some new companies and some not so new companies that can surprise the market with game changing products.
Apple did this with the iPod, the iPhone and the iPad.
Its competitors have been playing catch up ever since. Apple stock rose dramatically as these products were introduced and revolutionized the market for mobile devices.
Apple stock may, or may not, be a good buy. Always consider the price, since it is hard to make a profit if you buy too high.
Companies of all sizes are trying to understand what it means to function in an environment that is moving off the desktop and on to mobile devices.
Solutions to these problems will be the basis for many new opportunities. This is still very new territory and few clear winners.
Returning to my original premise at the beginning of this article, one of the first questions you need to answer when considering a company in any industrial sector is do they solve the problem or meet a need.
Facebook went from a college dorm room to one billion registered users in just a few years. It was the hottest IPO (initial public offering) in many years and the biggest early disappointment. Its future is still uncertain.
For most long-term investors, looking for another Apple or IBM, consider investing only about 10% of your portfolio capital. That is an acceptable risk for many long-term investors, but may not be for those approaching retirement.
If you're fortunate enough to fine a gem such as Apple, congratulations but don't let it go to your head that every risky investment will pay off.