How can I put technology to work for me so that I can achieve financial freedom?
The Stock Market is designed to transfer money from the Active to the Patient.
(#CommissionsEarned)
– Warren Buffet, World Class, American Investor, Business Tycoon, Philanthropist, & Chairman/CEO of Berkshire Hathaway
How can I make money investing in the best technology? Which companies are going to be the next FAANG (Facebook-Apple-Amazon-Netflix-Google)? Observing, analyzing and deciding on which tech stocks will take us where we want to go requires patience and a plan.
What it Takes to Build a Solid Tech Portfolio
Our goal here is not to spoon-feed these answers, but to teach each other. Yes, we first build a solid foundation, but beyond that, we instead need to learn to share experiences and teach each other the lessons we need to learn, grow, and become more capable along the way. For there is no textbook that can tell us what the future will be, there is no encyclopedic path that will lead us to the next great investment. Instead, it is about observation, experience, communication, and commitment.
We know that technology drives growth. So how do we capitalize on it? With all the wild fluctuations in the market today, we need a reasoned approach that for those of us with limited means will not cause us to lose our lunch every time the market swings wild! People get nervous, and that is when people make mistakes. Our purpose then is to establish a baseline we can rely on and build upon.
Therefore, we need a plan that keeps us focused, diversified, in the game, disciplined and engaged. Focused on how technology applies to the markets. Diversified against different types of stocks. In the game always; even when things are tough. Disciplined when everyone seems to be racing in another direction. And, always researching, always engaged, in the process of developing stock picks, and putting our money to work wisely.
Focus: Zeroing-in on Tech
An exploding current of rapidly changing technological and sociological advancements are changing our lives forever. There is no doubt about it. These opportunities abound now like at no other time in the history of our world. The human experience, therefore, is also forever changed.
Altered by a world that is now more artificial than natural; we are, altered carbon.
The entrepreneurial activities that produce new technology and innovate the future are the lifeblood of economic activity and opportunity in the world we know today. We need to learn how to blend patience, commitment, and research into our investments so that we can benefit from the profitability these companies enjoy. BCB Cyber can help inspire and guide us in this direction.
Understanding the “Tech” Market
Social media, smartphones, computing, genetic engineering, and streaming video are just a few examples of tech disrupting the world today, but how these technologies are applied in different parts of the market can be the difference between discovering the next Amazon or Google, or on the opposite end of the spectrum, the next Blackberry, Yahoo, or even AOL.
Like Morpheus guiding Neo in the Matrix, BCB Cyber can help us to understand the Construct; more specifically, it can help us understand how the world of the stock market is organized and how we can work it to our own advantage.
While businesses of the world are guided by greed and self-interest, they also exist to provide value to their shareholder through a broad and complex game known as the stock market. The big secret, and most amazing aspect of the world’s best and largest wealth generator, is that we too can and should be individual players, or users, in this game world. In fact, it is one of the greatest tools of all time for individuals, like us, to define their own financial futures and build the wealth capable of infusing life with opportunity. It is therefore on us to use this tool so that we can use it to redefine our lives.
The companies that make up the global world of stocks are therefore not the enemy. They are not the evil corporate empires we once feared. Yes, they are built on greed, power, and self-interest, but they are also a tool and a force for potential good. They are instead our star players in a game we can play as users, ready to carry our team to the championship. If only we could harness their power correctly, as individuals.
Just like the games and sports we play, individual players in the stock market are grouped into factions, and these groups are further organized into broader classifications for the purpose, and/or reflective need, to understand how the competition in the game world is organized. At the top, the largest levels, we find the sectors. Below them, the industries, of the stock market. And at the most fundamental level, the companies themselves.
Put simply, sectors are the major categories analysts and pundits put companies into based on generalized characteristics and “commonsense reflections” of the business world that help us to define the smaller, more digestible chunks known as industries.
Organization
Sectors serve as incredibly important guideposts for markets and investors as they are good rules of thumb for us to understand how the competition is playing out in a given market at a specific time. As one financial genius put it (thanks for all you do, and a big Booyah! to Mr. Jim Cramer), and I am paraphrasing here, up to 50 percent of the movement of any given stock is sector dependent. Simply put, sector matters! Stock prices move with their sectors; if we want to profit, we need to pay attention and learn how the market moves.
As of January 2020, there were generally recognized to be 11 sectors. They are as follows: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Information Technology, Materials, Real Estate, and Utilities. There are a number of great sites to use when tracking these sectors, however Fidelity offers some unparalleled tools.
Beyond following the sectors, we look at the industries. There are far more industries than sectors, being there are 69. Therefore, to get to a more focused analysis, we move from sector to industry when comparing and evaluating companies.
While understanding the general trend in the movement of a stock price can be aided by following sectors, it is in learning about and following industry trends that we can provide ourselves even more insightful analysis specific to the types of companies we are interested in and their direct competitors. In other words, it can be the most useful, and one of the simplest, tools we can use to examine and evaluate competitive edge and opportunity in the market.
A New Definition for How Tech Applies
Not to get too far ahead of ourselves we need to discuss something you may have noticed a couple of paragraphs ago. We have a problem.
All these sectors and only one was marked technology. Does this mean technology is not impacting other sectors? Does it mean that any technology-based company is always placed into this category? Absolutely not. Technology as we already know intuitively is at play across all these categories.
Lost in the code itself…
the markets do not always reflect the fact that some companies are actually tech companies at their core even though they may not be listed under “Information Technology.” More dangerous yet, the opposite situation may exist. A company may claim to be a technology company but their mission and business model would demonstrate otherwise, creating an understanding trap for us: the would-be investor.
Photo by Markus Spiske on Unsplash
In addition to this general conceptualization issue, the market is a laggard; meaning, that the market is often late to recognize the next great tech company until it must race to catch up. Even though many companies rush to try to label themselves as tech companies to exploit growth trends when it suits them, the market still places many of those flying under the radar, those companies mis-sorted into arcane classifications, into the wrong category.
This is where we, the enlightened, have an opportunity. For in the confusion we can find value, and value means profit.
Think Amazon of the early 2000s when it was thought only an online bookseller and priced accordingly, or Tesla today, still being thought of often only as a car company. Despite its incredible diversity, the “technology” sector of the stock market, or “information technology,” is simply misguided.
Broken down into four main, mega-conventional categories: hardware, software, network & internet, and semi-conductors. It often misses technology companies like Tesla that would be instead lumped in with Consumer Cyclicals (Sector): Auto Manufacturers (Industry) as it is today.
In the end, the rule is simple: Pay attention to sectors and industries as they are an incredibly helpful guide in finding undervalued tech companies. Albeit, often not as the market intends, we must be the ones to decipher the true impact tech will have on a given company.
It is only when incredible growth due to disruptive tech occurs that the markets react and adjust the price. At that point in time, an undervalued stock quickly becomes expensive and no longer a good investment.
Diversity
All this talk of sectors and industries and it recalls the oft-quoted notion in the markets regarding diversity. “In order to build a responsible portfolio, we need to be diversified” is what they tell us – across sectors and industries. But wait, we just said these categories are often misleading.
Exactly! Therefore, BCB Cyber advocates for a different approach to diversity when investing in technology, particularly disruptive technology. No, we do not look to balance across traditional sectors and industries, but we do look to balance across different types of tech stocks based on their life cycle.
Breaking apart the conventional definitions, we too seek to disrupt and provide inspiration based on a company’s true potential.
All companies will move through various stages of life, much like anything else. They will often exhibit periods of rapid growth early in their existence, those that can maintain those levels of growth through competitive edge become industry-defining Mega-Caps (companies with market capitalizations – the total dollar market value of a company’s stock – of over two hundred billion or so for the Mega-Caps), and finally, those whose growth slows but remain, solid players in their industry (think IBM, Cisco, and Oracle) will become dividend payers (offering a good yield – about 3% – cash payment to stockholders at some regular interval – most likely quarterly). Yes, companies may move in and out of the different cycles over time but the tendency derived above is far and away the most common and likely.
Each of these steps in the cycle offers the opportunity for us to balance out our portfolios. Maybe not in the way they want us to, but in a way that gives us the balance we do need. We gain growth potential, strength in market share, and dividends to help drive the books in lean times.
With balance, we can take advantage of the fall. Balancing our portfolios across these types of “tech stocks” in addition to keeping 10-30% cash on the side and tech-asset class investments, will keep us from leaning too far into the high flying, hi growth companies that can often have wild swings in stock price or by going overboard on the stability dividend payers can seemingly offer.
Incorporating Mega-Caps and Dividend Payers and everything in between will offer stability, and consistent cash flows to keep us in the game even if things get tight economically and/or the market is crashing. Staying in the game though can be tough mentally, even with balance. Therefore we need a few more strategies for keeping us going and growing.
Staying in the Game
Keeping the investor, our conceptualized user, in the game and in-focus, is the whole point. For if we cannot sustain our portfolios over the ebb and flow of the market, we will never find the financial means we seek so that we might redefine ourselves and our futures.
There are several tactics we must make full use of if we are to keep our portfolios healthy and growing. I know this is where people think it gets too difficult for us to manage our own portfolios. Not true!
Adding diversity in these various ways, taking profits along the way, and again keeping a cash reserve (giving us the ability to buy when things go down) that we can balance our portfolios and not panic. We will not panic because we expect the possibility and prepare for it.
Panic and market swings aren’t the only thing that can remove us from the game. We, the users, too are guilty of removing ourselves due to lack of interest! As we begin to enter the markets, our low financial means can often make it seem that it isn’t worth getting involved. For how can I invest in this great company X, when I can’t even afford ONE share! I know that feeling too as I’ve long wished I could buy Google, or Amazon. They just always seemed too expensive.
However, there are ways to build up to it. Yes, we can buy fractional shares, but who wants to own .001% of 1 share of something or less. That’s exactly what happens if you try to buy $30 worth of a $3000 stock! It can be totally defeating; even though the actual value is still $30. There is a tough mental toll that comes with this kind of investing and we must strengthen our our capacity to overcome this.
Another alternative, we could wait years or even decades for a stock split or reverse split (that is where total shares are simply multiplied or divided by some new factor respectively). The value of the company does not change in a split, just the value of a given share.
So, if before a split we owned 2 shares and the company we owned conducted a 5-for-1 split you would now own 10 shares, but the total value of our shares would be the same; in our example if we owned 2 shares at $50 total, after the split we would still have $50, but now we would have 10 shares.
Therefore we could wait for such an opportunity, as the cost per share would be less, but then each share is ostensibly less valuable than it was before if only in appearances. And, appearances count! For this can prove defeating to our psychology as well even if we do have the same value in real terms. We are in this to grow remember, and even if it appears to the contrary, whether or not it is really that way, we can feel defeated.
While those are just psychological tricks of the market, there is another way that we can build up our portfolios until we have enough to invest in some of these larger names; a way that is built so that we can see the growth.
Mentioned before, we can use ETFs. By using ETFs – Electronically Traded Funds, a group of stocks put together in a portfolio around some theme that may be actively or passively managed but always has an expense ratio (meaning fees), we can still invest in these companies until our positions are large enough to move the investment directly into share ownership of the large Mega-Caps we desire. We get the dual benefit of watching our portfolio rise, and the share counts.
The trick is managing the weighting of the ETF (how much of our company is there in the actual fund), the expense ratio, and any potential yield (dividend) we might receive. Building a position slowly this way can give us the opportunity to build off the growth of these companies (as the ETF price ostensibly rises as the companies it holds do) while gaining the benefits of diversity (as the ETFs will hold many different companies), dividends (if offered), and the psychological victory of watching our share count grow.
I know it may seem a small thing, but when we are starting out watching our shares grow can really instill confidence in what we are doing. There is no match for putting piles of effort in and watching that hustle bear even greater fruit!
Remember, our goal for this site is accessibility for the average person. The ones working the 9 to 5 minimum wage gig who struggle to find an opportunity with few prospects and really anyone who suffers in the low life of any kind. We know this can all seem super scary. We know some stocks simply seem astronomical and out of our reach. But, since we are a slow-build through a fast-tech model, we offer ways to grow without having to drop that $3K on Amazon!
A Note on Numbers
There is a lot of discussion about how many stocks we should have. While the actual number should be and is a personal choice, the simple fact remains that we must always be doing our homework and this takes time. If we go overboard and load up on thirty stocks, we lose both the capacity to not only keep up with what we have but also the ability to explore new possibilities.
Ten to fifteen is optimal. With ten to fifteen, we can keep up with our companies and still find the time to research. Remember, we already have our hustle on and time is a commodity that we need to balance as well.
Discipline
It would be easy here to say, why don’t we just put all of our money into ETFs and never change. The reason is the very same reason we began in the first place: Growth of Wealth and the opportunity to truly redefine who we are. Yes, there are many benefits to the ETF but chief among their drawbacks is that they could never match the growth potential of a great, single stock! Remember, they are the tool we use to move past hurdles toward owning the great companies. To follow this path though we must be disciplined.
Discipline may be the most straightforward aspect of managing our portfolios, we merely need to take profits as we gain them (in tools like ETFs) and re-balance our portfolio proportions along the way. This includes eventually buying the great companies we followed into ETFs; remember, we choose ETFs by first assessing REAL tech companies and evaluating the ETFs that give us the most exposure to those companies.
Assuming their fundamental stories (both in terms of narrative and business fundamentals) are still as strong as they were when we entered into a particular ETF, we would potentially profit so much more by owning the actual company now. So we must maintain our discipline and make the moves needed to own the company, not the ETF.
Discipline within our portfolio requires greater effort still on our part.
As we come to own more individual stocks we need to be steadfast in our commitment. When our stocks are flying and they seem like they can only go up forever, we need to be making our money: that means taking profit. Do not mistake this as something that will last forever, and most certainly do not buy the “fear of missing out” (FOMO) movement.
When tech stocks catch fire, its time for us to make money and build our wealth. Remember, its about preparation (observation/analysis, experience, and communication) and commitment. It’s crucial to remember that we are buying companies and preparing ourselves (no one else) for the long haul; remember, we are not so wise as to think that we can predict the market. We can however study, pick great companies, and manage accordingly.
This is the same for both trends. Just as it is important to be ready to act when stocks start racing up, when our stocks start to slip, we need to be prepared and disciplined as well. Before the moves ever start to happen, it is imperative that we analyze our portfolio, prepare a cash reserve, and have a plan in place for how to operate during a drop. What we do in this regard is simple as well, we will plan and spend our cash reserve to support my best companies (those that we individually believe in the most based on all our research).
If single companies are moving south based on the ebb and flow of the market and the company is still fundamentally the same as it was when we decided to invest in it, we can set levels say 10 or 15 percent and 25 or 30 percent where we will buy in staggered sets.
For example, if a given stock falls fifteen percent, we could decide to use 10 percent of our cash reserve to add to our position and if it falls another 15 percent (for a total of 30 percent) we could use still another 10 percent of our reserve fund to add to our position in some way, be it directly in the company or ETFs with high concentrations of that company.
It is an absolute must that we continue to research the company through this period. If our thesis on the future growth that caused us to buy the stock in the first place is still strong, we should remain resolute in our position and add to it.
It is the disciplined investor who wins; for no one ever went broke taking profits and managing losses. Not to mention, their own mental well-being. We must be disciplined investors, never moving too far too fast, we want to make sure that we are not swept away by market sentiment.
As we might have noted a few times, the key to doing so is being engaged, and by that, we mean observation, research, and analysis; yeah, the fun part! This is so important that BCB Cyber considers this to be Getting Tech-Engaged with Stock Market Investing.