Question

why shouldn't we suggest investors invest on technology industry (since it has the biggest growth on ROE 2015-2017) but invest on captal goods industry ( has a lower growth)?

please help me to explain in detail and give example

Answer 1

The technology sector is the category of stocks relating to the research, development and/or distribution of technologically based goods and services. The term technology sector is frequently shortened to tech sector and is used interchangeably with technology industry. This sector contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology.

The technology sector offers a wide arrange of products and services for both customers and other businesses. Consumer goods like personal computers, mobile devices, wearable technology, home appliances, televisions and so on are continually being improved and sold to consumers with new features. On the business side, companies are dependent on innovations coming out of the technology sector to create their enterprise software, manage their logistics systems, protect their databases and generally provide the critical information and services that allow companies to make strategic business decisions.

Big tech companies have the allure of generating great investing returns. What many people don't realize is how risky these companies can be. The three reasons why investing in tech stocks may not be the right move are :-

1. The technology industry is hard to understand. Town underscores how it is often difficult for tech companies to articulate the value of their companies to those not enmeshed in the business. A notable example of putting undue trust in an industry was the dot-com boom of the 90s. Many investors put all their savings into the tech industry, only to have the strategy backfire.

2. Tech products lose competitive advantage through planned obsolescence. This occurs when you see your smartphone or laptop lose the majority of its functionality with a new update. Tech products operate in a rapidly changing industry, and so it can be difficult for tech companies to rise above competitors.

3. Most tech companies are new and unproven. Related to the unpredictable turnover of tech products, most tech companies are introducing new products that the market is not familiar with. New tech companies are especially vulnerable to fluctuations in the marketplace -- changes not even established companies are immune to.

One of the other basic truths of equities is that tech stocks frequently sport higher premiums than almost any other market category. In theory, this high level of valuation is recognition of the above-average growth rates that successful technology companies post. In practice, though, even unsuccessful companies can carry robust valuations right up until the point where the market gives up on those growth prospects.

Technology also has an above average number of public companies that do not yet produce profits or cash flow. The absence of a track record forces investors to use more guesswork when building discounted cash flow valuation models. Clearly, this is a sector where the details matter.

Whether or not investors should concern themselves with valuations in the tech sector is a subject of ongoing debate. Certainly, there are investors who have done well by following the growth and investing in category leaders (or emerging threats to the status quo) and nimbly moving from company to company irrespective of valuation. On the other hand, investors who are not so nimble, as they believe or misjudge the competition, find themselves holding very expensive stocks with no underpinning of value to support them.

For Example

When in 2000-02 dot.com internet bubble burst, the five biggest companies on the stock market (Microsoft, General Electric, Cisco, Walmart and Intel) accounted for 15.5 per cent of US GDP. Which means that anyone who owned those stocks at the market top suffered some serious portfolio pain. It was assumed that they lost money on those five names for the next decade. But they assumed that not predicting the market woes for “FAANG” stocks — those of Facebook, Amazon, Apple, Netflix and Google.

However, it did warned us against the dangers of blindly assuming that what is working now will work forever and that paying any price for a stock will be rewarded in future.