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if you're in technology, you shouldn't be investing in tech companies Warren Buffett avoided investing in technology companies during the dot-com tech bubble b

by wes-exp 14y ago

if you're in technology, you shouldn't be investing in tech companies Warren Buffett avoided investing in technology companies during the dot-com tech bubble because he didn't understand them. So according to the most legendary investor of all time, understanding what you invest in is crucial. To exclude investing in tech companies because your income comes from tech companies might be a good strategy to diversify and mitigate against short-term market fluctuations. But it's an incredibly stupid strategy if you're shooting for growth and willing to accept some level of risk. Because your tech expertise gives you the best chance of actually investing intelligently in tech.

dasil003 14y ago
Leaving aside the eggs-in-a-single-basket aspect, I think being too close could be a liability. You may read a lot of bearish press about Apple that emphasizes market share over profit share completely missing the point of Apple's culture and the fact that foregoing the standard protectionism is what allows them to pursue the next great product so much better than anyone else. You might be totally right in this thinking and yet still be screwed by the market because it's full of speculators subscribing the conventional wisdom. And it's tech, so totally plausible for them to hold the stock down until consumer tastes move on and it becomes a self-fulfilling prophecy. I see so much dubious analysis of Apple (eg. suggesting Apple could go the Dell route) that I'm getting tempted to go long, but it's a tremendous risk because it's so damn frothy.
ajross 14y ago
I think you're missing the point. Yes, if you're willing to "accept risk" then obviously tech can be part of any portfolio. But the grandparent post was making a point about risk analysis that you seem to have missed. Because we are (presumably) already employed in the tech sector, we are already exposed to risk in that sector, even with nothing in our portfolios. A tech downturn is going to impact us disproportionately already, so adding exposure in our investment portfolios is adding extra risk in a way that it is not for a more typical investor. That doesn't mean "don't invest in technology", but it does mean that you need to be more careful about how you reason about it and not just brush the decision off as your willingness to "accept some level of risk."
- wes-exp 14y ago
  FWIW, I get (and got) the point. Restating the gp's arguments doesn't somehow make them more true. But let me clarify my own point. Suppose that industry X is the best industry to be in from a long term income and investment point of view, but that it's volatile in the short term. If the volatility is dangerous to you and you can't accept that level of risk, then diversification of your income and investments is wise. However, if you have sufficient risk tolerance, e.g., enough money in the bank and time on your hands to survive through the fluctuations, then it is still better to be all-in on industry X for your overall growth. Because it performs better over the long term. I'm kind of assuming here, for the sake of argument, that you maintain the same income+investment industry mix over time rather than changing it up periodically and trying to beat fluctuations. But, I hope this makes my point more clear.
  - ajross 14y ago
    It's clear, but it's still wrong: your risk tolerance analysis appears to include "money in the bank ... to survive through the fluctuations" of the market, but not to survive a simultaneous loss of your job. Which, because it is in the same sector as your investment portfolio, is very likely to be correlated with those downward fluctuations. Stated again, and for the third time: for technical professionals, investment of personal assets in the tech industry carries higher risk than it does for fund managers and other general investors. If you aren't investing with that in mind, you're fundamentally doing it wrong. This isn't a question of "risk tolerance", it's a question of correct mathematics.
    - wes-exp 14y ago
      For the second time you treat me like an idiot and assume that I'm missing the obvious and excluding the income aspect. I'm not. Let me come out and state it triple explicitly so it's clear to you: I see the income aspect. I realize that a loss of income is costly. I realize that income performance is correlated to the industry it's in and hence correlated with stocks in the same industry. That's the whole basis for the discussion and I see that. Jesus! I see that, and I still disagree. This is where both approaches can be right and this is the whole point I have been trying to make. For the sake of argument, suppose you have a trillion dollars in the bank and therefore infinite risk tolerance. Suppose also that your income is 100k. At this point, temporary loss of your income, which can also be reduced by unemployment pay, is wholly inconsequential compared to maximizing your gains in the stock market. If the tech sector pays back at 20% y/y (average) and the next best sector only pays back 5%, absolutely it's better to be in the tech sector even though your income comes from that. My example is unrealistic, but it serves a point: mathematically, it works. So the question is then how much risk (i.e. volatility) can you take in pursuit of maximizing returns? If you have a lot of assets, plenty. If you have no assets and therefore no risk tolerance, obviously diversifying your income from your investments is a good idea. But crucially, whether or not same-sector income/investment is a good idea all depends on how much risk (i.e. volatility) you can take. Would you suggest Steve Jobs shouldn't have held Apple stock? I think it worked out pretty well for him.

by wes-exp 14y ago

dasil003 14y ago

Leaving aside the eggs-in-a-single-basket aspect, I think being too close could be a liability. You may read a lot of bearish press about Apple that emphasizes market share over profit share completely missing the point of Apple's culture and the fact that foregoing the standard protectionism is what allows them to pursue the next great product so much better than anyone else. You might be totally right in this thinking and yet still be screwed by the market because it's full of speculators subscribing the conventional wisdom. And it's tech, so totally plausible for them to hold the stock down until consumer tastes move on and it becomes a self-fulfilling prophecy. I see so much dubious analysis of Apple (eg. suggesting Apple could go the Dell route) that I'm getting tempted to go long, but it's a tremendous risk because it's so damn frothy.

ajross 14y ago

I think you're missing the point. Yes, if you're willing to "accept risk" then obviously tech can be part of any portfolio. But the grandparent post was making a point about risk analysis that you seem to have missed. Because we are (presumably) already employed in the tech sector, we are already exposed to risk in that sector, even with nothing in our portfolios. A tech downturn is going to impact us disproportionately already, so adding exposure in our investment portfolios is adding extra risk in a way that it is not for a more typical investor. That doesn't mean "don't invest in technology", but it does mean that you need to be more careful about how you reason about it and not just brush the decision off as your willingness to "accept some level of risk."

wes-exp 14y ago
FWIW, I get (and got) the point. Restating the gp's arguments doesn't somehow make them more true. But let me clarify my own point. Suppose that industry X is the best industry to be in from a long term income and investment point of view, but that it's volatile in the short term. If the volatility is dangerous to you and you can't accept that level of risk, then diversification of your income and investments is wise. However, if you have sufficient risk tolerance, e.g., enough money in the bank and time on your hands to survive through the fluctuations, then it is still better to be all-in on industry X for your overall growth. Because it performs better over the long term. I'm kind of assuming here, for the sake of argument, that you maintain the same income+investment industry mix over time rather than changing it up periodically and trying to beat fluctuations. But, I hope this makes my point more clear.
- ajross 14y ago
  It's clear, but it's still wrong: your risk tolerance analysis appears to include "money in the bank ... to survive through the fluctuations" of the market, but not to survive a simultaneous loss of your job. Which, because it is in the same sector as your investment portfolio, is very likely to be correlated with those downward fluctuations. Stated again, and for the third time: for technical professionals, investment of personal assets in the tech industry carries higher risk than it does for fund managers and other general investors. If you aren't investing with that in mind, you're fundamentally doing it wrong. This isn't a question of "risk tolerance", it's a question of correct mathematics.
  - wes-exp 14y ago
    For the second time you treat me like an idiot and assume that I'm missing the obvious and excluding the income aspect. I'm not. Let me come out and state it triple explicitly so it's clear to you: I see the income aspect. I realize that a loss of income is costly. I realize that income performance is correlated to the industry it's in and hence correlated with stocks in the same industry. That's the whole basis for the discussion and I see that. Jesus! I see that, and I still disagree. This is where both approaches can be right and this is the whole point I have been trying to make. For the sake of argument, suppose you have a trillion dollars in the bank and therefore infinite risk tolerance. Suppose also that your income is 100k. At this point, temporary loss of your income, which can also be reduced by unemployment pay, is wholly inconsequential compared to maximizing your gains in the stock market. If the tech sector pays back at 20% y/y (average) and the next best sector only pays back 5%, absolutely it's better to be in the tech sector even though your income comes from that. My example is unrealistic, but it serves a point: mathematically, it works. So the question is then how much risk (i.e. volatility) can you take in pursuit of maximizing returns? If you have a lot of assets, plenty. If you have no assets and therefore no risk tolerance, obviously diversifying your income from your investments is a good idea. But crucially, whether or not same-sector income/investment is a good idea all depends on how much risk (i.e. volatility) you can take. Would you suggest Steve Jobs shouldn't have held Apple stock? I think it worked out pretty well for him.