Can I make 20% returns consistently in technology stocks?

I was posed with this very simple looking question, but more I thought about it the more I realized that the answer was not simple.

 The problem here is how do we define ‘consistently’? We know it is cannot  be ‘guaranteed’ because that will be ‘risk-free’. So it boils down to how much risk (read – portfolio fluctuation) you are willing to take before you bail out of your stocks. To answer this question I looked back last 10 years and collected 506 tech companies that satisfy the following criteria

  1. The company is in the ‘Technology Sector’
  2. The stock was trading from Jul 1997 till Jul 2007, That means no new IPO companies like Google were considered.
  3. The stock was traded in NASDAQ, NYSE or AMEX market (no OTC).

So I should point out that there is some ‘survivor bias’ in our collection logic, and we are also ignoring companies that merged or were bought out. The following chart shows the Risk vs Return Efficient Frontier for these 506  stocks.

Annual Returns of Tech Stocks

Average Annual Returns of Technology Stocks from Aug 97 to Jul 2007

Let me point out some interesting observations.

  1. If you held all these companies in your portfolio for all the 10 years (and invested equally in all of them in Jul 1997) your average annual return will be 24% (Yeah!) but you will see very large fluctuations in your fortune (ie will take a lot of risk). Your annual returns for the entire portfolio will fluctuate from 107% (in year 2000) to -25% (years 2001, 2002).
  2. In the same period the S&P500 companies returned only 10% but saw lesser fluctuations.
  3. The more interesting observation is made when you compare the individual stocks with S&P 500 risk/returns. Look at the stocks above the red dotted line passing S&P500 point. All the stocks above this line are those stocks which give better risk/return tradeoff compared to S&P500.
  4. The stocks closer to the top curved efficient frontier line are better performing stocks than those below them.

So to summarize, Yes you can make 20% in Technology stocks (looking at history) if you have a stomach to stay in the market. You also need to select a broad basket of stocks. I have not thought how you could have identified the winner stocks ahead of time, but for the curious here is the list of stocks that did better than S&P500 risk/return tradeoff. A lot of unknown names here for me, and more importantly most of the names I would have thought to be here are NOT! So there is a high chance that we may end up picking the wrong stocks.

 Winning Stocks
ANSYS INC
ELECTRONIC ARTS INC
APPLE INC
QUALITY SYSTEMS INC
SCANSOURCE INC
FACTSET RESEARCH SYSTEMS INC
DAKTRONICS INC
MESA LABORATORIES INC
COMTECH TELECOMMUN
INTUIT INC
ANIXTER INTL INC
PROGRESS SOFTWARE CORP
NAPCO SECURITY SYSTEMS INC
SYMANTEC CORP
DST SYSTEMS INC
AFFILIATED COMPUTER SERVICES
INNODATA ISOGEN INC
AEROFLEX INC
EPIQ SYSTEMS INC
MICROS SYSTEMS INC
RIMAGE CORP
AMPHENOL CORP
ANSOFT CORP
CAM COMM SOLUTIONS INC
THQ INC
O I CORP
CACI INTL INC  -CL A
POLYCOM INC
YAHOO INC
CASS INFORMATION SYSTEMS INC
NATIONAL INSTRUMENTS CORP
DIODES INC
ADOBE SYSTEMS INC
FISERV INC
CITRIX SYSTEMS INC
CDW CORP
MEASUREMENT SPECIALTIES INC
MANATRON INC
MICROSEMI CORP
SILICOM LTD
NCR CORP
ROFIN SINAR TECHNOLOGIES INC

Disclaimer:  All the views in this blog are strictly mine and does not represent my employers.

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