Several months ago my brother was showing off a new investment app he downloaded and is currently using. Robinhood is a free phone app and service that allows investors to make free stock purchases from their phone. Because the Robinhood app and service is free, it offers zero information about individual stocks.
While he was showing me his newly discovered app, I glanced down his stock portfolio and noticed his inventory included mostly technology stocks. “Bad move,” I told him, “technology stocks are extremely volatile because growth is based on new technologies.” I found myself reliving a lifetime of mistakes as I explained myself.
I was heavily invested during the tech-burst of 2000. I watched my stocks start climbing ferociously from 1998 and never thought there was an end. During the two years leading up to 2000 I invested heavily in technology. One heartbreaking day I watched my dreams fall apart as I lost everything.
Technology, as I told my brother, is highly volatile because it’s based on new stuff. Additionally, technology has an expiration date. Companies can’t have a product that sits for long periods of time without constantly redesigning and marketing.
AMD, for example, manufactures computer processors and video cards primarily for the PC and laptop markets. Although AMD has several products in each category, each of those products has a maximum lifecycle and is typically discontinued after a short time. New products are constantly being developed to displace the old.
In other words, AMD is constantly redesigning its product lines to meet consumer and technological demands. One of AMD’s longstanding processors is the Athlon. Although they’ve been using the namesake for more than a decade, today’s Athlon processor is significantly different than even the last generation.
On the other hand, a company like Johnson & Johnson manufactures a bunch of different product lines that don’t typically need to be reinvented. Baby shampoos and Band-Aids haven’t changed in years which means their products can be engineered once and sold for long amounts of time. If Johnson & Johnson develops a new product it doesn’t usually replace one of their existing ones.
Technology products typically don’t hold their value for very long because they are displaced by newer and better. When the new version of a processor or video chipset is put on the market, manufacturers and resellers typically start liquidating the old at discounted prices. Markets become flooded with reduced price items that sometimes reduce the perceived value of the new products.
The only way a technology company can increase their value is by diversifying their product mix. AMD’s core market has been computer processors. Years ago they bought another company that specialized in video chipsets. Today, AMD is adding to their product line to include processors for new markets including specialized servers and gaming consoles which will allow AMD to enjoy returns from many segments.
I pulled up five year stock data for both companies and placed them side by side. Purchasing Johnson & Johnson stock five years ago would have been a better investment for several reasons. Although most stocks have short term blips, Johnson & Johnson shows straight line growth with a 46% return over 5 years. AMD, on the other hand, would have returned 30% over the same time with a giant scary dip about three years ago. Because investing isn’t my thing and technology is, I choose to stay far away from technology stocks.
(Jeromy Patriquin is the President of Laptop & Computer Repair, Inc. located at 509 Main St. in Gardner. You can read past articles at www.LocalComputerWiz.com.)