Volatility in the markets always brings up a bit of nostalgia regarding the "way it used to be." This is no different when we're talking about the stock market or the market for technology goods and services, a market where even executives from mighty Cisco Systems have commented about the recent slowdown occurring faster than in any other time of their careers.
But having professionally followed the stock market for over a decade, I'm not helped by nostalgia these days. Why? Because before the sky-high price-to-earnings ratios, the ponzi-like-momentum investing schemes, and news release-driven euphoria, investors had to focus on fundamentals that drove better-than-expected results--and a key aspect of these fundamentals revolved around new product cycles.
Today, I just don't see a way to invest in product cycles. Even grouping technologies and finding new "waves" of growth is difficult; the landscape is just too cluttered and diverse, and investment time-horizons are now longer than most product cycles.
Twenty years ago, one could invest in a mainframe product cycle, and if research indicated that the new product was good, this would be enough to improve results and drive the company's stock upward for a number of quarters. Even during the heart of the PC era 10 years ago, investors could make money by spotting cycles--whether they were hardware-related (black-and-white to color monitors, 486 to Pentium chips) or software-related (like the Windows 95 upgrade).
Reading tea leaves
But today neither of these will work.
The mainframe, while it still has lengthy and meaningful upgrade cycles, is too small a segment (even for IBM) to have a big impact on earnings or stock prices. Regarding PCs, the eternal hope for the next "killer app" remains just that--a hope.
The "Web," broadly defined, was the most recent widely used application, and it hasn't required a new product cycle in either hardware or software.
Possibilities for the future are speech recognition and video communications, but these appear no closer to significant commercial reality than we thought they were two years ago.
Even so-called sector or computing-trend investing is getting more challenging. Perhaps the hottest segment recently, Internet infrastructure--which was dominated by networking and storage companies whose growth far outstripped expectations--has abruptly slowed.
Yes, I'm a believer in more bandwidth, the need for optical technologies, the benefits of vast pools of virtual storage--but demand just isn't as robust today for any of theses technologies compared with even six months ago.
Many investors made money on playing technology "waves"--the PC-distributed computing wave, the client-server wave, the Internet-ubiquitous communications wave, and finally the wireless computing wave.
One could build portfolios of companies in the semiconductor, software, hardware and services industries that would benefit from these technology trends and significantly outperform the market.
What's an investor to do?
Still, today even the trends that will likely evolve in the future have already been hyped, whether it's the potential of WAP (Wireless Application Protocol) and third-generation, or 3G, wireless technologies, or of streaming video and digital media--hence my opinion that expectations are already too high.
So what is an investor to do? In my view, finding new products that change the game are what's left for the technology investor. It's not easy determining what are disruptive technologies that are imbedded in new products; it requires more than a grain of technical understanding. But that will be the key to investing success in the future.
One only has to look at Cisco and EMC to see examples of disruptive change--and of how long new product technologies can drive a company's superior results. Intra-computer communications used to be handled by computers themselves, whether it was mainframes or a Vax. But standalone routers grew to be significant once multi-protocol connections were needed in the distributed computing landscape. EMC was once a small company going after IBM's 80 percent share of system storage, but it introduced a product that was faster, more reliable and less expensive than the competition.
Both companies, by the way, looked like hardware companies, but significant value was (and remains) in their software.
In the future, don't look for evolutionary product cycles--they will happen too fast to invest in. Try to find the revolutions that are based on real new products that customers can't get enough of.