Technology is ever improving. It would come as no surprise then that in an upmarket technology stocks would outperform the broader equity categories and/or equivalent cyclical stocks.
The market price of equities is determined predominantly through supply and demand. At IPO stage a price is determined by underwriters, many a time investment banks, based on studying the underlying fundamental financial information of a company.
Accordingly, once an issue price is determined, the secondary market price (when available on an exchange) is then totally determined by demand and supply.
Technologically IPO’s have been very popular in the past decade, many a time seeing prices soar as a result of hyped demand in the moments following a trading launch. A good example is that of Linked In, which was attractively priced at IPO to more than double within its first trading day.
Facebook, however, was one very clear example where the market anticipated an overvalued IPO. The price did soar when Facebook shares began trading on May 18, 2012, though the session closed a mere 23cUS higher than the IPO price of $38, and the stock price fell more than 20% lower in the month that followed.
Reasons ranged from a technical glitch by NASDAQ on the start of the trading day to analysts perceiving the stock as having been offered overvalued. The Facebook IPO was adjusted upwards on three occasions prior to launch.
Today, however, having held on to Facebook shares since 2012, sees investors enjoy a 460% upside gain.
Like Facebook, many successful technology stocks have similar upside momentums over a five to 10 year period.
According to a Morning Star study, Bull markets tend to outlast Bear markets by five is to one, hence holding cyclical equity stocks for the long term, especially popular technology names has the potential to generate positive returns, despite riding out the waves of volatility in the markets.
Investors with shorter-term investment horizons may not benefit off such an approach, yet for the young risk-taking investors, an equity portfolio exposed to well-studied technology names, whose industry is constantly being shaped by innovative ideas, offers the potential of a healthy payoff over the long term.
Such behaviour is not limited to technology. Non-cyclical companies, in the long term, have also benefitted off bull markets outlasting bear markets, albeit at a slower pace.
It is important to note that past performance should not be used as the sole indicator of future performance, as the markets are solely determined by investor expectations. Though the analysis of past investor behaviours can serve as a tool when determining the courses of action to take prior to investing in equities for the long term.
Investing in equities for the long term can generate a profit, yes, but timing is equally important. A new investor wanting to buy into US technology equities at current levels, should consider the market as being overbought as is the view of many analysts, and be willing to accept a possible correction and/or even a possible recession over the medium term.
Therefore if one’s strategy is to make a quick buck with technology stocks at the moment, look away, unless you’re ready to buckle in for the long-term, all you’ll be getting is a high chance of multiple bumps and bruises in the shorter term.
Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt.The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.