Investing in tech stocks

2013-05-24 3 min read

    I initially set out to write a post to complain about how difficult it is for an average investor to “hit it big” these days by investing in a tech company at its IPO but ended up changing my thesis after digging into the data. It’s still possible to get the same returns as it was in the 1980s but it’s not possible by a long-term investment in a single company.

    To start, I came up with a sample of large tech companies and looked at their performance since their IPO as well as their annualized return.

    CompanyIPO YearTotal ReturnAnnualized Return

    From this limited sample, it looks as if it’s still possible, but more difficult, to get the annualized returns of the 1980s and 1990s. It’s impossible to know whether the total returns will be comparable but I suspect that it’s going to be extremely difficult, if not impossible. To get a Microsoft-like return, Tesla would need to end up with a market cap of $760 trillion, excluding inflation.

    In a way, this is obvious. As more and more money pours into the VC industry, companies can afford to stay private longer and just keep on raising more funding. This gives company management and investors more control, keeps the company leaner, and limits public information. Unfortunately, this leads to most of the growth occurring before the IPO with retail investors not able to capture any of the value.

    While I’m optimistic that the JOBS Act will help, we unaccredited investors still need a way to invest right now. After leaving my finance job, I tried to replicate the traditional investment approach by doing research, analyzing statements, and reading coverage. But over the past few years I’ve been too busy and have just been investing in companies that I use and like. Unsurprisingly, this new approach has led to me invest in tech companies. Surprisingly, I’m doing better than ever before. Over the past 2 years, I’ve bought stock in three companies: Tesla, Netflix, and Yahoo with the lowest gaining 66%. I realize these returns can’t keep on going so the question becomes when to sell and invest in something else. For this, I’ve been looking at market caps compared to other companies in the same industry to estimate their potential. In my case, Tesla has a market cap of $11B while Audi’s is $26.6B and Toyota’s is $191B, and definitely has room to grow. The standard disclosure when giving financial advice is “past performance is not an indication of future results” and it’s definitely true in this case. I’m just glad I found an approach that suits me.