Physicians see all kinds ofnew technology in the medicalfield and in their dailylives and are tempted toinvest in them, but investingin high-technology can be difficult. It'simportant to apply the same investmentprinciples when buying nontechstocks, such as margin of safety, long-termvalue investing, and choosingcompanies with high-quality management.However, valuation measuresfor high-technology companies, bothconventional measures and nonconventionalones, have proven to be farless developed than the valuationmeasures for companies that are nothigh-technology.
Management Is Key
It is important to build a solidframework for investing in high-technology.This framework relies heavilyon evaluating the quality of the managementteams, good understanding oftechnology, and valuation methodshoned during the many years of usingand adjusting the valuation parameters.New markets in high-technologyusually have quite a few participants atthe inception of the market, and predictingthe winners who will dominatethe market is exceedingly difficult.
Physicians should evaluate managementteams of the competing companiesin a given market. Look for teamsthat have the ability to excite for thelong run and to lead a companytoward domination for many years.Avoid using investment firms' reports,which have proven to be weak in thisarea and seem to discount the evaluationof management abilities. Focusinstead on factors such as the appeal ofthe new technology involved, or theoverall dynamics of the segment.
When valuations of high-technologycompanies are performed, threeareas of possible undervaluing by themarket stand out. First, a promisingtechnology and a sizable market for itmay be recognized before the majorityof investors discover it. Second, thelong-term value of a company could beappreciated while it may, perhaps, befully valued for the short term. Third,a recurring low point in stock prices ofa cyclical company may be used toestablish a long-term investment in thecompany. This approach can be imprecisebecause of the difficulty of predictingthe company's cycles, establishingthe current position of the company inits cycle, and a tenuous relationship betweenthe company's cycles and thecycles of its stock price. The approachworks only for long-term holdings. Ingeneral, it's best to avoid cyclical high-technologycompanies with somenotable exceptions, such as Intel.
Stay away from "bottom-fishing," either in high-technology or outside ofit, and watch out for turnarounds inhigh-technology. While some recoverand yield large returns to investors, thevolatility created by investing in high-technologyturnarounds exceeds a reasonablethreshold.
Michael I. Schwartzman is president ofValueSearch Capital Management, LLC. Mr.Schwartzman has been in the top 20% ofUS money managers for the past 15 yearsby investing in a concentrated portfolio ofcompanies with excellent management and solid long-termprospects. He welcomes questions or commentsat 781-599-8839, or visit the ValueSearch Web site:www.ValueSearchFunds.com.