What 99% of Investors Don’t Understand About Tech Will Cost ‘Em

Keith Fitz-Gerald Aug 26, 2016
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Technology stocks have been on an incredible tear lately, beating the S&P 500 by up to five-to-one over the last year, and many investors are afraid they’re going to fall… that somehow the run’s over.

Not on your life.

And, not for reasons you might think.

Here’s what everybody else is missing.

Let me begin with a story that sets the stage for today’s Total Wealth Takeaway.

Most people have never heard of James Wilson Marshall.

He was a New Jersey-born carpenter working for a German-born Swiss citizen named John Sutter on a water-powered sawmill in California’s Sierra Nevada Mountains.

And, on January 24, 1848 he found gold.

Marshall and Sutter both tried to keep news of what he’d found a secret, but that obviously didn’t work. Less than 60 days later newspapers had begun reporting a sizable gold strike.

Enter Sam Brannan, another man you may not have heard of.

He was a store keeper in San Francisco and on May 12, 1849, he went screaming up and down the street with a bottle of gold dust in his hand in what accounts of the time called a “one-man parade.”

And the rest, as they say, is history – the Gold Rush was on.

Formerly skeptical residents fell all over themselves to head for the hills. Things were so “bad” in the city and “gold fever” so severe that people were literally dropping everything in their rush to strike it rich.

Business people were saddened to have to do their own laundry and cook their own meals. Ships were abandoned on their wharfs as passengers and crew alike made a beeline for the hills.

Almost everybody stopped by Brannan’s store to buy picks and shovels for the simple reason that they had to. He owned the only store between San Francisco and the nearby gold fields.

In less than nine weeks, Brannan racked up an incredible $36,000, or roughly $1,083,484 in today’s dollars, reportedly buying mining pans for 20 cents and selling them for $15 a pop.

Brannan opened additional stores very quickly to capitalize on the situation, one of which – at Sutter Fort – was soon selling more than $150,000 worth of supplies and sundries a month… in 1849. Today that’d be like your neighborhood drug store doing the equivalent of $4.4 million every 30 days.

Long story short, Sam Brannan became California’s first millionaire. And what he did back then is still with us today in the form of an oft quoted maxim…

…during a gold rush, sell shovels.

Now, it’s easy to look at this story and think about the shovels. But the real insight here is the people.

Brannan knew every one of the 200,000+ ’49ers who flooded into the area in search of riches had nothing and needed everything. And he realized that it would be the people – not the gold – who actually created the wealth.

That’s why he didn’t just sit on the cash he raked in, any more than you should today.

Brannan plowed most of the money he made as a merchant into speculative real estate in the Sacramento area. And that’s when he really began to accumulate wealth.

And the miners?

Most went bust despite the fact that they collectively pulled nearly three-quarters of a million pounds of gold out of California’s mountains. And, when they did, they returned to rent boarding rooms, make dresses, create bakeries, barbershops, and more, much of which sat on land that – you guessed it – Sam Brennan owned at that point.

And that’s where we come back to technology stocks.

Most investors think about today’s technology stocks like people thought about gold back then.

If only I could find the one company that’s going to strike it rich by creating some sort of new high tech gizmo,” goes the thinking.

Most will go bust just like the miners did.

But a few – a precious few who understand what John Brannan understood – are going to make money hand over fist in the years ahead.

I want you to be one of ’em.

You see, companies like Facebook, Amazon, and Google are the John Brannans of our day because they sell the shovels people have to have in tomorrow’s connected economy.

  • Facebook now has 1.7 billion people using it…
  • Google processes more than 5.5 billion searches a day and more than 63,000 searches per second…
  • Amazon has more than 63 million Prime members and more than 181.76 million unique monthly visitors to its website…

Every single one of which and one of whom is potentially a source of high margin revenue.

When you think about it for a moment in light of what you now know about John Brannan, these are the companies poised to grow no matter what the Fed does, no matter how Wall Street tries to hijack your money, and no matter what Washington thinks.

Each of them has taken the money they made initially as part of the technology revolution and started investing heavily in things like self-driving cars, robotics, artificial intelligence, altered reality, big data and more – all of which are scalable projects people “must have” in the very near future.

For example, Alphabet’s working on a wide variety of projects ranging from curing cancer to artificial intelligence, robots, clean energy, home automation and even, at one point, a freaking space elevator!

Not to be outdone, Team Zuckerberg is working on virtual reality, drones, and building the most sophisticated advertising engine in recorded history – things he wants to build because he wants to “make the world more open and connected,” according to a 2015 Fast Company interview.

Meanwhile, Bezos is plowing into big data services and continues to push the boundaries of what’s possible before other people have even thought about the stuff that he did… several years ago. For instance, Amazon Web Services – aka Amazon’s Cloud – is now a $10 billion business that is crushing traditional data providers.

And that’s on top of five key product sales areas worth nearly $2 trillion that are presently dominated by traditional retailers – clothing, home and kitchen, health and beauty, grocery and B2B spending which, all by itself, sold more than $1 billion of products alone within a year of launching.

What’s a company like Home Depot going to do?

Give you a better shopping experience?

A new kitchen sink?

Spiffy shelving?

No doubt you see my point.

As for which tech company will give you the biggest bang for your buck, I suggest you go after Google, now Alphabet.

It’s expensive but don’t let that hold you back. Buying even one share at $767.41 where it’s trading now is a deal for the simple reason that you’re not buying Google for what it’s done in the past. Rather, you’re buying Google for what it will do in the future.

The situation reminds me very much of Berkshire Hathaway, Warren Buffett’s shop and a stock that trades $212,829 per share today (A Shares).

Like Berkshire, which is constantly investing in new businesses, Google is, too.

The way I see it, Google is really 10 or more businesses in one. Restructuring the company to create Alphabet (of which Google is now one of several subsidiaries) last year is the first move in unlocking the value associated with Calico (life extension research), Nest (home automation and smart home services), and Google X (which serves as Google’s Skunkworks for top secret moonshot ideas).

The company has a 22% profit margin and, as of June 30th, is sitting on $77 billion in cash that it can spend on the most outrageous research imaginable. The company has received 152 upward revisions in the last 30 days.

More will follow and, each time they do, still more potential will be created, but you cannot play along if you’re not “in to win” at any price.

If you’d like to cast a wider net, consider the iShares North American Tech ETF (NYSEArca: IGM).

The ETF invests at least 90% of its assets in North American technology companies including those I’ve just mentioned. Created in March 2001, the fund has 271 holdings, trades at a 0.03% premium to net asset value, and kicks off a small but better than nothing yield of 0.91%.

Either way, remember that it’s not 1849 anymore and remember Sam Brannan’s maxim…

…in a gold rush, sell shovels.

Only remember that those very same shovels are bits and bytes now.

Until next time,

Keith

11 Responses to What 99% of Investors Don’t Understand About Tech Will Cost ‘Em

  1. Robert in Vancouver says:

    I agree, that’s why I’m buying HTA.UN on the Toronto stock exchange. It’s a covered call ETF that holds all the biggest tech names and pays a monthly dividend, which is over 9%.

    • Keith says:

      Hello Robert and that sounds like a great choice. Thanks for sharing!

      Best regards and thanks for being a part of the Total Wealth Family, Keith 🙂

  2. R. J. says:

    Samuel Finely Bates Morse transmitted “bits and bytes” on May 24, 1844. Morse stated that it was “the first means to transmit intelligence over long distances”.

    He was also sued at least sixteen times over his invention and patent rights.

    It was a stunning new epoch in the age of communication, and it was a hyper sonic economic stimulus to the gold rush 49’ers and the economy in general.

    Morse was called “lightning Man”. People of the day actually believed that he harnessed the powers of the ether to transmit messages!

    No moon shot but pretty heady stuff.

    Western Union sold lots of “shovels”. But they became stilted by their monopoly, thinking that upstart Alexander Graham Bell’s telephone was of no commercial value. After all, who would actually want to talk with somebody?

    Well, nobody…..

    So with all of their might, they suppressed it by barring right of way access to lines and by sabotage.

    It was the first high tech battle of titans when it unfolded into a legal entanglement.

    Western Union lost and bit the dust, not so much by the courts…but by people.

    People, as you state in your article, need new shovels. And Bell had them.

    One can learn a lot from dead inventors.

    • Keith says:

      Hi RJ.

      Your points are all well informed, as always. Thanks for taking the time to include them here.

      By the way, I’ve always been a huge Tesla fan. There is no doubt in my mind that there’s more to the story buried in the sands of time than we’ll ever know.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

      • R. J. says:

        Yes, there is more, much more, that we don’t know about Tesla, especially how his work has been covertly adopted and used by the government/industrial/military complex.

        Tesla was awarded, posthumously, the radio invention. It is said that he wrote president Roosevelt stating that he had a “death ray.” In addition, when he said that he could do power transmission sans wires, J. P, Morgan and other financiers pulled the plug (bad pun) on financial backing, as they were heavily invested in the raw material and means of wire production.

  3. Kaushik says:

    What is your thought about AAPL and MSFT ?

  4. Steve says:

    TECL is similar to IGM but leveraged 3x. It looks like a good bet in the long term, though you need to accept a lot of volatility.

    • Keith says:

      Hello Steve.

      That’s also an excellent choice; just be careful of the tracking error that’s introduced via volatility decay. That catches a lot of investors by surprise.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. Sid Schaffer says:

    I love it! Forget your charts and all your high faluttin analysts and buy the guys who sell todays shovels! Makes sense to me. Thanks! I love simple. I made my fortune with simple . Bought anything that Was offer substantially below market and sold at the highest market woud bear!

    • Keith says:

      Thanks for the kind words, Sid.

      I love simple and appreciate the clarity it gives me, especially at times like the present. And, I really appreciate you taking the time to share.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

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