Is Warren Buffett on to something by not investing in tech stocks? After all, it’s extremely difficult to value them. Most tech stocks increase in price when they release technology that no one saw coming. I couldn’t tell you right now if Microsoft Corporation (NASDAQ:MSFT) will be able to take market share away from Apple Inc. (NASDAQ:AAPL). Much is going on behind closed doors, and while we know that the companies are pouring billions into research and development, we can’t be too sure about their advances. And this creates a puzzling problem when deciding whether to buy share of one of these companies.
What do we know?
All we can go on is what we do know. Right now, we know that Microsoft is attempting to lead the way in cloud computing, a market that is likely still in its infancy. Microsoft dedicated its entire research and development budget of $9.6 billion in 2011 to developing cloud computing solutions that make storage easy for users. Hopefully for Microsoft, the woes of its user-unfriendly Windows 8 won’t plague its attempted breakthroughs in the cloud market.
What about Apple? Well, Apple Inc. (NASDAQ:AAPL) is rumored to be developing a version of the iPhone that is affordable for those in developing countries. The majority of people in undeveloped countries are using devises that were popular in North America 10 years ago — devices made by companies such as Nokia Corporation (ADR) (NYSE:NOK). (No offense to Nokia.)
The common denominator
But what does all this information that we do know have in common? It is all speculation. No one really knows whether Microsoft Corporation (NASDAQ:MSFT) will be able to make massive progress off of cloud technology. And how long has it been since a major upgrade to Apple Inc. (NASDAQ:AAPL)’s iPhone, or the release of a device similar to the revolutionary iPad? That is why it is so hard to understand technology stocks, because no one really knows the impact a device or software will have until the market has already reacted.
Even what would appear to be solid information about a company, such as performance history, doesn’t give me much comfort. For example, Microsoft Corporation (NASDAQ:MSFT) isn’t anywhere near its peak of around $60 in 1999. And a plunge could be near for Apple Inc. (NASDAQ:AAPL) if it begins to lose market share to copycat technologies from companies such as Samsung.
What to do?
Truly, an investor needs to have some courage when buying technology shares. For example, I couldn’t ignore the allure of Silicom Ltd. (NASDAQ:SILC)’s financials. Since buying about one year ago, the company has increased in price by about 125%. Maybe this was luck, but when a company has consistently performed and has regularly taken its niche to the next level, the chances of making a profit are likely in a bull market. Silicom has continually proven its ability to dominate the networking servers and components sector. What’s more, the company has reported it’s never lost a client. If that’s not an indication of what’s to come for this company, I don’t know what is.
Would Buffett take a chance on a technology stock when all the numbers lining up? Probably not, and certainly not a small cap. While I am too wary to buy into Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL), I still see big things ahead for Silicom even though there is potential for this little guy to be eaten up by the big fish. And that’s a scary proposition. But in a market full of unknowns, all an investor can do is make an educated guess. Usually, it works out.
Phillip Woolgar owns shares of Silicom. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft.
The article Is Technology Too Difficult to Understand? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.