Forget the "Next Apple." This Is How to Invest in Technology Stocks.
Picks and shovels. Picks and shovels. Picks and shovels.
If I could drill just two words into the brain of every investor searching for today’s most promising technology stocks, those two words would most certainly be “picks” and “shovels.”
The term, for those who aren’t familiar already, refers to the underlying products and services that enable an industry to operate. It dates back to the California Gold Rush, when thousands of prospectors were hitting nothing but dirt, while the people selling them picks and shovels were quietly making a killing.
In the high-profile world of tech, everyone wants to “strike gold,” so to speak, but not enough people pay mind to the metaphorical picks and shovels driving operations that are much lower in risk and often higher in reward.
That is, most investors think the easiest way to get rich buying tech stocks is to find the next Apple or the next Google, when the truth is far from the case.
Locating the next Microsoft or Facebook isn’t nearly as easy as you might think, even if you are 100% certain the technology they are producing will make it big.
Consider Google, to start. Let’s say you were absolutely certain in the mid-’90s that search engines were going to permeate our lives to the extent they do today. Having that kind of assurance would have given you an incredible advantage as an investor, sure, but would it have been enough on its own?
The pressing reality is that Google wasn’t the only search engine out there at the time, and it certainly wasn’t the first. You also had Yahoo, WebCrawler, AltaVista, LookSmart, Ask Jeeves, Lycos... The list goes on for quite a while.
And like the many abandoned gold mines of the 1850s, most of these companies (and their investors) struck nothing but dirt and are now either irrelevant or completely defunct.
The same scenario applies to the idea of pinning down Apple. Maybe you believed to your very core that the mobile phone was going to be the $430 billion industry it’s become today. Would that information alone have you rolling in piles of cash today?
Blackberry, Nokia, Motorola... each of these OEMs inevitably fell from grace and, at one point or another, managed to crush the hopes and dreams of countless investors despite operating right at the core of an industry destined to thrive.
This is the same kind of trap I see investors falling into every day when placing their bets on the “next big thing” in tech. It’s a pitfall I urge you all not to fall into.
You might be astute enough to know that virtual and augmented reality is soon going to evolve into a $150 billion market. And you might be bright enough to understand that automated vehicles are going to completely disrupt the transportation industry...
But if you’re only looking for the next big OEM, you’re simply prospecting for gold while someone is selling you picks and shovels behind the curtain.
The truth is hindsight is always 20/20. No one knew for certain before it happened that the iPhone would be the breakout mobile device. No one knew for sure that Google would knock every other search engine off its perch.
And you can rest assured that today is no different. Despite the many proclamations you may hear, no one knows which carmaker will lead the driverless charge. Will it be Tesla? Waymo? Ford? Uber? Lyft?
I know the ins ands outs of this stuff. I’m on my research grind every day, but I can honestly only wish the best of luck to anyone reading those cards and trying to pick a surefire winner out of the bunch.
The same crapshoot applies to all the augmented reality device makers out there. Facebook has the Oculus Rift, HTC has the Vive, Google has Daydream and Glass, Microsoft has HoloLens... you get the idea.
The key to avoiding this investor’s roulette spin (or at the very least increasing your odds of success) is to invest in the picks and shovels behind the curtain.
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In the case of search engines, the picks and shovels were keyboards, mice, and computer monitors. It didn’t matter which search engine succeeded; these were the mainstays that made it all possible.
Logitech (NASDAQ: LOGI), the most prominent maker of these devices, was trading at about $1.06 the day Google was founded. Today, it’s $37.00 a share. That’s a much larger return than Google’s public stock has ever provided, even if you bought it at the very bottom.
In the case of mobile phones, the picks and shovels were things like chip sets and wireless infrastructure providers.
Take one look at the returns of the iShares PHLX Semiconductor ETF (NASDAQ: SOXX) or any wireless communications REIT like American Tower (NYSE: AMT) or Crown Castle (NYSE: CCI), and you will understand why pick-and-shovel tech stocks were the best bets on the mobile device boom.
Of course, understanding what makes a pick-and-shovel stock requires a bit more work than just knowing that a particular technology is going to be big. You need to dig a little deeper and understand what components are required to make that technology function.
My job, at its core, is to make that information as clear and visible to readers as possible.
So here is some basic advice to anyone and everyone who wants to cash in on the next decade of technological advancement: Identify the trends, and then figure out the gears and chains that make them work.
Personally, my top areas of focus right now are augmented and virtual reality, autonomous systems, artificial intelligence, the Internet of Things, and 5G.
As for the picks and shovels, you can either do the research yourself or find guidance from someone like me. No one can ever tell you everything you need to know, but I can assure you this kind of coverage on tech’s picks and shovels is a good place to start.
Until next time,
Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and The Cutting Edge. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.
Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.
Outside the office Jason is a lover of science fiction and the outdoors, and an amateur squash player at best. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.
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