A few weeks ago, something really interesting happened to the market. Tech stocks started falling out of favour. The prices were downtrending. The big players didn’t seem interested at all. And, even though the market recovered rather quickly, I still wanted to take a moment to talk about it.
What is the right move in such situations? Hold? Sell out of your positions? Or add more?
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Hello everyone, and welcome back to investing with Antoaneta. Since I keep a close eye on tech stocks, I was able to see what was happening well-ahead of time, and I managed to add a lot of shares to my portfolio during the last few months. Check out my other blogs such as, “How To Invest A Lump Sum Of Cash“.
Today, we are going to take a look at the best ways to recognise and capitalise on downtrending tech markets.
I’ll also show you how I filter and “rate” my tech stocks when I’m short on time, and I only want to focus on the most lucrative opportunities.
What happened last year?
For the most part of 2020 and the first few months of 2021, dividend stocks were the thing that everyone was after. They had fallen out of favor, the prices were very low, and it was really easy to snatch some excellent deals for cheap. I’m very happy that I got the chance to diversify my portfolio and solidify my big positions in such a favorable market. But this is all done now. The time of cheap dividend stocks is over.
The Stock Market never stands still
People picked up on what was happening, and they started buying. Naturally, this slowly drove the prices up, and once the really big players got involved, the market recovered. From now on, you’ll have a hard time getting your hands on cheap value stocks, and I believe that this will be the case for at least the next few months.
What happened a few weeks ago?
Tech stocks were experiencing the exact same thing that happened to dividend stocks last year. They had fallen out of favour, and we were looking at some pretty significant dips.
How I approach this
I am going to use this opportunity to diversify my portfolio even further and add as many good tech stocks as possible.
But here’s the thing – the market never stands still. That window didn’t remain open forever. People eventually picked up on what was happening, they started buying, and the market slowly recovered.
My goal was to add as many shares as I could before this happens.
Of course, I’m not going to just go and start throwing my money at random companies just because they happen to be a part of the tech field. I’m going to be careful, I’ll take my time, and I’ll do my research.
How I pick my tech stocks
But, since I believe that the window will start closing no longer than a few months from now and since there are thousands of tech companies out there, I need a way to focus my research. Even if I was a full-time investor and this was all I did for a living, I still wouldn’t have enough time to go through every single company.
Focus on the industry leaders
In the current economic climate, I can’t justify betting on the underdog. I want solid and reliable companies—well-established companies with a proven track record and strong brand presence.
Look at the long-term
This one is obvious, really. We’re long-term investors, and we want to invest in businesses that have a bright future. I never allow myself to fall for the hype. I never listen to the media. I only ever consider companies that will do well at least three to five years down the line.
And what are the two biggest metrics that help me judge this before even looking at the financial reports? The mote and diversification.
A business needs to have a good, solid mote to succeed in the long term. And this is even more important when the economy is shaky, and people are worried about the future. You do not want to put your money into a company that could lose its clients to its competitors.
Diversification is another barrier against failure in the long run. I look for businesses that sell a variety of products and services—for example, a platform, a digital product, and some subscription-type service.
Consider the financials
The top four financial stats I use to filter out my potential investments are:
- Strong growth
- Free cash flow
- Good balance sheets
- Low debt
I want my companies to have 15%+ revenue growth (the higher, the better, of course) and free cash flow. This combination demonstrates their ability to manage debt and generate solid profit, which they can use to acquire some of their smaller competitors or other related companies. Think Microsoft and Discord or Salesforce and Slack.
Then, I also look for low debt (or preferably none at all). Companies with little to no debt do not have to worry about interest rates, and they can focus their funds on growing the business.
In summary: I follow the basic rules of long-term investing, but I filter by my main two factors before I dive into the financial details.
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Recommended for further reading:
- Think and Grow Rich
- The Wealthy Barber
- Learn how to make more money and transform your life
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
- Stock Market Investing For Beginners: The Investment Guide
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