By Yale Bock
NEW YORK (AdviceIQ) -- This year's choppy stock market makes some investors leery, but a good rule of thumb is to invest in the industries of the future, namely tech and tech-related companies. But which ones and which specific companies? And what should you avoid?
1. Beware of over-valued tech initial public offerings. When new companies in the digital arena go public, their valuations are too often too high to sustain. That leads to price plunges later, burning early investors. The problem is chronic, and shows no signs of abating. Look at possible upcoming IPOs.
Pinterest, whose users share images and videos, is supposedly worth $5 billion. Airbnb, which allows travelers to book rooms (usually in private homes), carries a cool $10 billion valuation. Car service provider Uber, $3.8 billion. Based on a Wall Street Journal report, there are at least 30 startups all over the world that venture capital firms value at more than $1 billion.
Many of these companies are very good examples of why so many investors are skeptical of the stock market. At the behest of the venture firms, investment bankers take these fledgling companies public at levels where the only way early stock buyers can do well is if the companies double, triple or quintuple their revenues and user bases.
Consequently, the depressingly familiar result is what happened with Twitter (TWTR), Facebook (FB), Yelp (YELP) and plenty of other high-tech darlings. They go public at extended prices, the public unfortunately buys them and the stock plummets 20% to 50%. If the company has a good business plan and executes, the stock recovers eventually, which is what happened (and then some) at Facebook and Yelp. Twitter, though, still changes hands at 15% less than its IPO first-day high last year.