Murphy’s Law: For Long Run, You Can’t Own Enough Tech
A popular rule of thumb among financial planners is that an individual investor should subtract his or her age from 100, and the resulting figure is the percentage of the person’s assets that should be in stocks.
That’s only partly right, says Michael Murphy, editor of the California Technology Stock Letter and a well-known name around Silicon Valley. Subtract your age from 100 and that’s the percentage of your total assets that should be invested in technology stocks alone, Murphy argues.
With the hammering many tech stocks have taken in recent months, the idea of concentrating one’s stock assets in tech no doubt chills many investors. But Murphy insists he’s just being a realist. Name another economic sector with the long-term growth prospects of tech, he challenges.
He has history on his side: Over the last 10 years, the average technology stock mutual fund has soared 498%, according to Lipper Analytical Services. That far exceeds the 393% gain of the average Standard & Poor’s 500 index fund, as well as the 345% gain of the average general U.S. stock fund.
Past performance isn’t necessarily indicative of future results, of course. And Murphy, though normally a very astute and soft-spoken observer of the Silicon Valley scene from his perch in Half Moon Bay, arguably has more reason to resort to hyperbole today about tech, as he travels the country promoting his new book, “Every Investor’s Guide to High-Tech Stocks & Mutual Funds” (Broadway Books, $27.50).
But in the context of a slowing global economy (courtesy of East Asia) and the struggle many U.S. industries would face boosting earnings even without Asia’s woes, Murphy’s point about the tech business’ long-term growth prospects is well-taken.
Investors who fear that the technology industry will simply fall off a cliff one of these days fail to grasp how large and diverse the business has become worldwide, and how integral it now is to daily life in the office, the factory and the home, Murphy says.
More important, the use of technology has reached such critical mass that with continuing innovation and improvement in computers, software and telecommunications, “these companies drive their own demand,” he says.
Case in point: “Five years ago, who knew they needed an e-mail address?” Murphy asks. Today, if you have e-mail you can’t imagine life without it. If you don’t have it, chances are you will.
Still, the rapid pace of change in tech also assures that it will continue to be one of the market’s most volatile sectors, with plenty of losers for every big winner, says Murphy, who became a computer programmer in 1965 (anyone remember COBOL?) and has been tracking tech stocks since 1970.
What’s more, tech companies are forever at risk of “profitless prosperity,” Murphy concedes: Demand may be great for a particular product, but ever-increasing competition may keep a tech company’s bottom line from growing much, if at all, despite strong sales.
So his stock-picking advice (which naturally is the centerpiece of his new book) focuses on a few formulas that Murphy says have proved themselves over the years:
* Buy tech companies that are already profitable and that continue to spend heavily on research and development. He wants to see a company’s R&D; total at least 7% of sales.
Wall Street may not immediately reward management that spends a lot on R&D--in; fact, the biggest spenders’ stocks may be depressed because R&D; cuts into current profits, Murphy notes. But long-term, effective R&D; spending means “new products, dominant market share, high margins and high rates of growth,” he says.
Murphy calls these stocks “growth-flow” issues. He includes in this group such well-known names as Intel, software firm Adobe Systems, phone-call-processing systems firm Aspect Telecommunications and telecom equipment company Tellabs.
* Stick with the five industry leaders. Murphy argues that Intel, Microsoft, database software firm Oracle, computer-networking giant Cisco Systems and semiconductor-manufacturing-equipment company Applied Materials are “so far ahead [of their competition], they aren’t going to be caught” any time soon.
That’s debatable in the fast-moving tech world, of course, but Murphy insists those five names make up a great core tech portfolio. The recent plunge in the stocks of Oracle and Applied Materials is a gift for long-term investors, he says.
* Buy into the next wave of biotech products. Murphy believes that biotech is on the verge of a boom in federal approvals for new products to treat many chronic diseases of aging, including diabetes and cancer.
Some of his favorite biotech names include Chiron, Ligand Pharmaceuticals and CoCensys.
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Tom Petruno can be reached at tom.petruno@latimes.com
