The Three New Rules for Tech-Stock Investing

Even when Motorola delivered a hit such as the Razr, the company managed to quickly turn a hot phone cold because it didn't understand it was managing a fashion phenomenon. That's a fundamental mistake in this new market for technology goods that Apple(AAPL Quote), a technology company that has become adept at selling the sizzle, would never commit.

3. Instead of growing profit margins, think shrinking margins. There's so much capital in the world now that a high profit margin becomes a red flag that draws a horde of well-funded competitors from around the world -- and at least a few of those are willing to run at a loss for years because the government that has arranged the financing has goals besides profitability.

So many technology products are now produced by contract manufacturers that new competitors don't face a steep learning curve before they can efficiently manufacture a new product.

The use of contract manufacturers means that only those few technology companies, such as Intel, that run their own factories can reap higher profits from increased manufacturing volumes. And finally, because many new technology products are extensions of newly developed technologies, being first to market now yields months, not years, of outsized profits until competitors catch up.

And Now for Energy

But in the energy sector, the three old rules of technology investing are still a great fit:

1. The hockey stick lives. In the energy sector, truly innovative -- and therefore extremely risky but potentially very profitable -- technologies are just now moving from proof of concept to the early stages of the hockey stick.

Take Color Kinetics(CLRK Quote), for example. Sales grew by 28% in the first quarter of 2007, but sales are still tiny: $65 million in 2006. The company has demonstrated its LED lighting technology, built up a portfolio of patents and increased manufacturing efficiency while attacking the market for digitally controlled solid-state color lighting.

In this market, the company has recently tested a system of digitally controlled color lights on the Empire State Building and signed a contract with Ford(F Quote) for an LED instrument panel that would allow drivers to control the color of the display.