Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Innovation drives the American economy. Since the days of Ben Franklin, we have celebrated and handsomely rewarded those who come up with The Next Big Thing. In recent years the creators of “apps,” those small computer programs that perform useful and/or amusing tasks on our mobile devices, have epitomized American inventiveness. In mid-2008 just 500 were apps available. Today there are more than 350,000 on the market with a projected 2013 revenue in excess of $29 billion.
Facebook’s recently announced plan to buy the maker of the Instagram app for a cool $1 billion demonstrates the excitement about the app industry. About a week before the deal was announced, Instagram had secured a loan for $50 million. The terms of that deal valued the company at about $500 million. Four days later, Facebook swooped in and paid twice that amount. It’s a pretty sweet deal for Instagram’s early investors, but a cautionary tale for average investors.
While the technology sector is currently creating lots of jobs and wealth, I’m getting a “buyer beware” sense of déjà vu. These huge acquisitions and ridiculous numbers (millions become billions in four days?) remind me of the tech bubble that marred the start of this new century.
In the late 1990s investors went gaga for website businesses and e-commerce companies like Pets.com and Webvan, driving share prices to unsupportable highs. Then came the Tech Crash. Between March 2000 and January 2001, the tech-heavy NASDAQ lost 50 percent. It was a devastating blow, especially for small personal investors who jumped into those stocks with “irrational exuberance.”
But here’s the thing to remember: Over that same time period, the Dow Jones Industrial Average was up 8 percent. Utility stocks like Southern Company and Consolidated Edison gained more than 45 percent. Chesapeake Energy climbed more than 175 percent. Meanwhile, Apple Computer lost about 73 percent.
Grandma used to say, “Fool me once, shame on you; fool me twice, shame on me.” As the tech sector continues to heat up with Instagram-type deals, look for ways to cash-in while maintaining a diverse portfolio that is in line with your long-term goals and risk tolerance. If you’re not a fat cat who can invest in private equity funds, consider looking at a technology-based index fund or ETF.
Stick with a rational, fundamental approach to investing long-term and you’ll end up with far more money than you could ever make trying to ride the latest investment wave. And you’ll sleep a lot better at night.
– By Wes Moss, for Atlanta Bargain Hunter