The concern with the technology sector is that it’s always evolving. The time period between development cycles in everything from smartphones to laptops is shrinking to the point where there’s soon going to be no differentiable gap anymore. For the tech companies themselves, that could be great news, as it keeps consumers excited about potential new products. However, from an investable standpoint it’s terrible news because it creates high levels of competition and more efficient production lines that deliver a precipitous downslope in product costs.
Memory-chip maker Micron Technology, Inc. (NASDAQ:MU) is one such company that’s wholly dependent on demand from the PC and electronics industry, and is completely at the mercy of flash memory and DRAM prices. It can expand its production or reduce its costs as DRAM and flash prices rise and fall, but it doesn’t have the tools necessary to break the bonds associated with the cyclicality of the tech replacement cycle.
With regard to metals and mining, many of the same principles are in play. Spot metal prices have a propensity to move higher when the economy is expanding and pull back when it’s contracting, placing many spot prices in somewhat predictable peak-and-trough patterns, but making it very difficult to hold them over extended periods of time like a decade. Global gold miner Newmont Mining Corp (NYSE:NEM), for example, has delivered shareholders just a 75% return since 1988, because its demand can ebb and flow with the economy and it’s completely at the mercy of spot gold prices. Comparatively speaking, a 30-year U.S. Treasury note and the inflation rate would have netted you a better return over that period.
Also, many of the most commonly investable metals, like silver and gold, are used as electrical conductors in electronics devices, which, as I just noted, are easily commoditized. The natural evolution of the tech cycle has the ability to affect the demand for certain metals in both positive and negative ways.
Again, as with capital intensive business, this doesn’t mean there aren’t good long-term investments to be had in commoditized companies — they’re just much tougher to find.
Think long and prosper
The idea of pointing out these two scenarios isn’t to get you thinking short-term, but to get you to recognize that variations do exist and it takes more than throwing a dart to pick out a winning investment. Keep that in mind if these sectors are on your radar, but always remember that with regard to investing success, history is in the favor of the buy-and-hold investor.
The article 2 Scenarios Where Buy and Hold Rarely Works originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Dendreon.
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