Rules for tech investing

Although I have my own standardized checklist, I believe this list provided by Dan Benton, best summarises the top rules to follow when investing in technology. Dan Benton worked at Goldman Sachs for 25 years and created this list whilst he was there, these rules I believe still hold true today and have been quoted countless of times.

Momentum

1. Sell technology stocks when estimates are being reduced.

2. Buy technology stocks only for positive earnings surprises.

3. Positive earnings surprises occur when revenue and earnings growth are accelerating when average selling price are rising and when gross margin and operating margin are rising.

4. Most technology stocks ideas are product-cycle stories.

5. New product cycles often lead to earnings surprises; product cycle transitions usually lead to earnings disappointments.

6. Technology stocks also do well when companies rebound from periods of poor execution.

Valuation

7. Value investors don’t make money in technology. There are few ‘cheap’ technology stocks.

8. Don’t buy on relative P/E, P/B, P/R, particularly when estimates are falling (see Rules 1 and 2).

Seasonality

9. Technology stocks performed poorly in the summer.

10. Seasonal slowdowns cause secular concerns.

11. Second-tier companies do poorest in the weakest seasonal periods and provide anecdotal evidence of an industry slowdown.

Management

12. Reorganizations without restructuring charges usually lead to earnings disappointments within two quarters.

13. One-quarter problems exist (but only if caused by supply constraints).

14. Management usually appears weakest at the bottom of a product cycle.

15. Insider selling doesn’t matter; management gets new stock options every year.

Old World/New World

16. Traditional mainframe and minicomputer companies are in secular decline.

17. It is increasingly difficult to differentiate companies that sell microprocessor-based computers.

18. Execution is the most important distinguishing factor in a standards-based world.

19. It is hard to forecast execution.

Summary

20. Don’t forget Rule 1.

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