Technology is very short-cycled. This is one of the reasons not to invest in tech-stocks for long term, as Warren Buffet says. Well this is true if you are an 10-20 years long term investor, but the way you earn money is in the early and short term.
Recently I gave a talk at TEDx
and for this I made a short analysis. And? I must say it really shocked me. I knew well that tech stocks hype and stagnate, but I did not realize that there is actually a general pattern going on. What you can see analyzing most of tech stocks in many countries that they usually have a steep growth phase of 5-8 years and after that they stagnate. As an example look at Microsoft
. Established around 1980, VCs ?81, IPOed ?86, had a exponential growth 1996-1999. Than it dropped and didn?t gain anything for the remaining 10 years. A similar pattern you can observe with other tech stocks. Usually it starts extensive growth after VC investment, followed by an IPO few years later and still aggressive growth in the first few years being public. This value appreciation takes 7-9 years, than it stalls. You can observe this pattern with the greatest companies of their time, e.g. Digital
, Sun, Microsoft, Netcape, AOL.
You can observe it also on other markets. Take a look at polish IT leader - ComArch
. Started 1993, grew exponentially till 2000, when it reached it?s highest valuation of 1.2 bln zl. After that for next 10 years did not beat it anymore, although the company grew. From shareholder point of view - did not build any value.
Why is that so? One of the reason are market cycles of course. It means when you reach a high valuation because of market hype or bubble, you should exit (partially at least) because it might take the sector ten another years to reach it fundamentally. But the more important reason is that tech business reinvents itself all the time, and well established companies do not catch changes fast enough. So we had IBM (king of the mainframes), Digital (king the minis), Microsoft (king of the desktops), Compaq (king of the laptops), SUN-Oracle (kings of client-server), Netscape (browser battle), AOL (internet access), Google (king of early internet, will stall soon), Facebook (king of social - internet 2.0). Each of them facing the same game of not being able to adapt to the paradigm shift allowing huge competitors to grow. A pattern with one only exception - Apple, that managed to innovate and re-invent its business model all the time. They however became victims of their own proprietary systems that failed Apple II to PCs and will most probably loose iPhone to Androids.
Growth is short cycled but it does not mean it?s bad. The best way to earn on technology is to establish companies, grow them and sell - what VCs do. You can also buy them at IPOs. If you bought Microsoft shares at IPO you would earn 50x after 10 years. If you bought Google at IPO you would make 7x within 5 years. This is really not bad, and choosing those companies is a no brainer too. You just buy the hottest game-changers in tech. It was not difficult to see Microsoft, or Google were the ones, as it will not be difficult to guess that Facebook
will be one too.
Of course even better returns make VC that enter few years prior to IPOs, but this is another game.