He may sensibly decide to forget about his love of all things tech and stick with investing in nice safe stocks that are not impacted by the kind of wild swings we see in technology. He could indulge his tech passion by doing some coding and writing gadget reviews and buy stocks in something nice and safe like say....newspapers.
Which is the problem for that investing style. Bits of destruction spare no industry. Oh come on you say, that maybe true for all things media related such as music, newspapers, book publishing and so on. But what about nice and basic manufacturing (the sort of company which one New York investor described to me as "making products I can drop in the Hudson river and it makes a splash and ideally leaves an oily ring")? Read Chris Anderson's piece on the next Industrial Revolution in Wired and tell me if you are not just a bit uneasy. OK, but oil, technology only has an incremental rather than a disruptive impact there, right? Wrong. Do you want to make a generational bet on Exxon and against Tesla and Project Better Place and the countless start-ups going for the same black gold replacement market?
Yes, I know, Buffett himself has invested in an electric car company, in China.
So you have to invest in technology, it disrupts anything else you want to invest in. You are investing in technology consciously or unconsciously. Warren Buffet does not invest unconsciously and it is unlikely his hypothetical geeky son would do that.
So maybe you should just surf the tech waves and trade in decade time-stamps? That has been the model that works for Silicon Valley Venture Capitalists. But that is a game for Silicon Valley insiders. As a public market investor, do you simply buy whatever they offload to the public markets via an IPO? That does not seem very conscious. Nor has it proved a generational play. When the wave that the hot IPO company is riding recedes (and all tech waves do eventually recede) the venture is left high and dry.
So you need to invest in tech companies that have surfed one wave, nearly been drowned by the second wave, learned from that and institutionalized the art of tech wave riding and institutionalized the process of CEO succession planning with this objective in mind.
This is not a bad time to invest in big tech stocks. They are not as highly valued as you might think. Look at the Price Earnings Growth (NYSE:PEG) ratio for the 7 stocks in my Big Tech Index.
So who can you safely invest in based on that filter? It is a very, very short list. But there are some yet to be proven cases and the big money maybe made on those. Or lost.
Lets start with the very, very short list of proven cases: IBM and Intel
IBM (NYSE:IBM) went through it's near death experience when the PC wave threatened to drown the mainframe wave. Lou Gerstner turned that one around as memorably described in Teaching Elephants To Dance. His successor, Sam Palmisano, looks like he is going to continue the good work.
The Intel (INTC) board seem to have succession planning down to a fine art. They have institutionalized the "only the paranoid survive" culture and their CEO succession planning is best in class. In 50 years time when we swallow our nano-scale computers or wear them, Intel is likely to still be a great company.
Here are two almost proven cases: HP (NYSE:HPQ) and Cisco (NASDAQ:CSCO).
One More Succession Needed. HP (HPQ). The two founders, Hewlett and Packard, earned their name over the door in perpetuity by institutionalizing a culture that survived them. Cultures need to be continually updated as the world changes. Carly Fiorino tried this and failed, even if history proves that her strategic call on acquiring Compaq was correct. The new CEO Mark Hurd seems to have pulled off the difficult job of updating the culture. To truly join IBM and Intel in the very short list we will need to see one more successful CEO succession. Put this in the "buy when the price is good and hold but check-in regularly" category.
See how the big bet works out. Cisco. John Chambers is passionate about avoiding the fate that befell once-great companies such as Wang and Digital Equipment when they failed to ride the next wave. By moving into servers he is going up against some giant competitors but finding growth when you are Cisco's size requires a move as bold as this. If he pulls this off and finds a good successor to build on this, Cisco will join the short buy and forget list.
Now for the rest of the tech giants, hold on to your hats folks, this ride will be bumpy:
In the furnace: Yahoo.Carol Bartz may turn this around and this will put her in the Gerstner class and make Yahoo a really great company. If that happens just when the current king on the Internet hill, Google, stumbles (as they have to at some point), then fortunes can be made betting on Yahoo. But Yahoo is also terribly vulnerable today. Put this in the "for brave speculators only".
Outsourcing outliers: TCS, Wipro, Infosys. Labor cost arbitrage (salaries are lower in India than America) was a wonderful wave to ride for a couple of decades, possibly an even easier way to make money than the Internet. The 3 companies that made it to the top did so because have the best management. But the arbitrage is narrowing; costs are going up in India, wages are coming down in America and US competitors can tap any labor cost savings that remain by setting up shop directly in India. If the Indian outsourcers really find the next wave to ride and transform their business that will be a great feat. This is unlikely to happen as there is no immediate crisis that will enable management to change the culture. These businesses are still very profitable and growing. Put this is in the "buy as a value stock when the price is low relative to current cash flows but don't bet on long-term growth".
Case not proven despite valiant effort: Microsoft. All it seems to take is competent engineering (Windows 7 vs Vista) to turn the Windows gusher back on full blast. But a transformational play? They have been at this too long to bet on this happening now. Steve Ballmer sure tries hard and is smarter than 99.999% of people on this planet but.... Put this in "ask for dividends and stock buybacks".
Case not yet tested so certainly not proven: Google. The Google gusher is still on full blast, so they certainly don't need a transformation. This means that management has not been tested in this way. The Google management triumvirate (2 tech co-founders, Brin & Page, plus experienced CEO, Schmidt) may be perfect in executing a transformation or maybe severely tested and tensions between the three could be extra troubling. The market seems to be already factoring in a secular slow down in growth, based on a PEG that is around 1.
Can you institutionalize magic? Apple. This is the mother of all succession problems. Steve Jobs has created something close to magic with technology. He clearly has a great team, but "making magic" is a hard process to institutionalize.
Maybe more than one man: Amazon. Jeff Bezos at Amazon is one of the greatest entrepreneurs of the Internet who has continually re-invented the company to fit the changing times. It is possible that he has institutionalized this continuous reinvention process; in which case Amazon will join the very, very short list of buy and forget tech stocks.
Can the founder re-ignite growth? Dell. Dell's direct model with just in time delivery and positive working capital cash flow was so successful that it totally disrupted the PC industry. That makes it very hard for him to re-ignite growth by adopting some of the traditional channel strategies that he derided for so long. That he is attempting this is testament to his passion, but it is a tough transition. Put this in the "watch and wait" category.
We have categorized them into 3 tiers:
Tier 1: Buy and Forget. IBM and Intel.
Tier 2: Buy on dips, plan to hold a while but check-in regularly: HP, Cisco, Amazon.
Tier 3: Keep and eye on these transformations before making any decision (unless you want to make a bold bet that one of them will pan out): Yahoo, Google, TCS, Infosys, Wipro, Dell, Apple, Google.
Disclosure: no positions