Sharing Knowledge in Smallcaps : This is worth a repost. Good "rules"

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Posted by: timhyma	Date: Monday, March 11, 2002 4:19:19 AM
In reply to: None	Post # of 46461

This is worth a repost. Good "rules"
Posted by: ageiche
In reply to: None Date: 3/10/2002 11:11:40 PM
Post # of 16307

10 Rules For Technology Investing

As 2002 draws on and reshapes the stock market with its own quirks (Enron, for one), then we look again at the core principles that helped us find winners in 2001 and bring out some of the top companies for now and the future.

The markets today undergo a valuation argument daily, sellers selling today's earnings and buyers buying tomorrow's. Both are right.

No two investors need the same portfolio. A younger recent college grad will have a different portfolio mix than a retired executive.

As a backdrop to investing, it's important to use asset allocation among different types of investments and different risks. Bonds, stocks, real estate, savings, cash. For example, blue chips with slow growth but steady earnings and upstarts with high growth and unpredictable earnings.

But across all the categories, we've found these 10 'rules' to be a good starting point.

1. Earnings matter. Don't pay for promises, pay for actual earnings. Things change too fast to pay for next year's performances. If a company lacks earnings it's higher risk. If higher risk then debate whether or not you're comfortable with that but limit the exposure to higher risk by making it a small part of your overall investment strategy.

2. Don't be wowed with the technology, be wowed with the business model, management team, marketshare, technology and most of all, cash flow and earnings. The best technology doesn't always win. Xerox PARC developed most of the key improvements for PCs and networks but yielded none of the benefit directly to Xerox the company. Look for technologies that companies need to make business more efficient (less cost), to replace outdated methods, to streamline operations, that fix a problem. 'Need to have' technologies, not 'nice to have' technologies.

3. Forget the peaks, study the valleys. Just because a stock is 50% off its high doesn't mean it's a bargain. Don't believe the newspaper headline. As investors we learn more from mistakes sometimes than success. Study a company's ups and downs and economic cycles -- and what is it's price to earnings, P/E, not how far has it fallen from its 52-week high. How far is it off a low and is the low in line with a 'reasonable' valuation? Reasonable being 10x to 30x earnings depending on the growth rate.

4. Listen to what the executives say, but more importantly, listen to what customers say. Look at inventory pile up or order backlog.

5. Learn the difference between 'betting' and 'investing.' Most investors know this by now. If you have to ask then it's betting, no different than playing the slots in Vegas.

6. Diversify investments. Stocks. Bonds. T-Bills. Real estate. In stocks limit exposure to high risk. Examine low, medium and high risk stocks and know why you own any one of them. Know what the company does and how economic cycles help or hurt the company.

7. Cash. How much does the tech company have? Can it pay the bills for several years without selling equity or debt? Does it have a cash-flow positive business? Earnings to sustain itself? How much cash is on hand? Working capital? Debt? (Debt killed Global Crossing and Enron).

8. Stock options. Many tech companies issue stock options and it may dilute the shares outstanding (and earnings) dramatically. Typically 25% to 30% of tech companies are owned by employees. They all want to convert their options to cash some day. Priceline (NASDAQ:PCLN) had tons of options issued to airlines.

9. Establish buying and selling discipline. Always employ a stop-loss to limit your downside. Typical is making it 20% from the cost of the shares or the closing price if the stock climbs. On selling, if the stock has risen a set percentage -- whatever you're comfortable with -- sell some or all. Take profits. You may miss more climb but at least you have limited downside. Or if management shuffles happen quick or earnings fall short, consider selling.

10. Never get emotionally attached to a stock. Love the company's cash flow or earnings but not the stock. There's nothing magical about a ticker symbol. Just because you made x% on a stock last year doesn't mean it's still a great stock or will continue to rise. Technology changes. Some companies can make the change and others don't. Take profits, buy your significant other some flowers or chocolate. Smell the flowers, eat the chocolate. And repeat rules 1 through 10 as needed.

http://www.siliconinvestor.com/insight/editorial.gsp?id=61603

Small Cap plays: #board-865
Big Board plays: #board-711

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