The Second Rule for Grabbing Massive Tech Profits

16 | By Michael A. Robinson

The road to wealth is paved by tech – but only if you follow five key rules.

In my last column, I unveiled the first of those five … and promised the second rule would follow shortly.

Today, I’m keeping that promise, and am going to tell you all about Rule No. 2.

Better still, let me start by telling you a story that shows you how this rule works – and how much money you can make by using it …

Late last spring, the “experts” were telling anyone who would listen to avoid eBay Inc. (NasdaqGS: EBAY) at all costs.

CNBC, MSNBC, all the “best” financial Websites … no matter where I looked the message was the same: The company’s best days were behind it, its numbers were eroding, and there was nothing the experts could see that would change the auction site’s flagging fortunes.

But I knew differently.

You see, Wall Street is like a big club – a club that nurtures like-minded thinking and discourages dissenting viewpoints. Because it’s so big, and so influential, its views are the ones you read in the mainstream business press.

If you really want to get wealthy, you need to think for yourself.

And that’s just what I did.

I knew that the “experts” had totally blown it when they looked at eBay.

They missed an ongoing turnaround in the company’s main business. They missed the impact that some strategy acquisitions were going to have. They missed the shrewd foray eBay was making into the digital-payments realm – a sector that offered the company an explosive profit opportunity.

The upshot: The experts missed the fact that eBay’s shares were about to soar.

I didn’t keep this to myself. In fact, I told Money Map Press subscribers “two years from now, you’ll wish you’d bought this stock.”

I was right. Ten months after I made that call, the company’s stock is up 40%. That’s double the return of the “record-setting” Standard & Poor’s 500.

Best of all: That 40% profit is just the start.

eBay is suddenly an “in” company on Wall Street, and analysts are extolling the “turnaround” being engineered by the team of CEO John J. Donahoe. Analysts are saying that eBay’s shares, now at $57, could go as high as $70, for a return of 20%.

But at that level, our subscribers would pocket a 70% gain – because I was able to tell them to buy at $41.

And I was able to make this call because I followed the second of my five rules … the tech-investing blueprint that lets me find the best stocks before they soar into the stratosphere.

Tech-Wealth System Rule No. 2: Separate the Signals From “The Noise”

You can see why I warn investors to ignore “The Noise.” It’s the Siren Song that will lead you down the path to investment destruction. And most retail investors end up succumbing … which is precisely what Wall Street wants to see happen.

But the Noise is hard to ignore. I mean, it’s everywhere. It’s the latest “Buy” ratings from Goldman Sachs or some other investment bank. Or it is CNBC Mad Money host Jim Cramer yelling into the camera, firing off opinions like a turbocharged Gatling gun.

IPOs are another place where you can find a lot of hype. The investment bankers want to make every new issue sound like it’s the Next Big Thing in Tech.

How’s that Facebook IPO working out? It’s off 28% in a year. Groupon is a 56% loser – a train wreck that recently cost the CEO his job (and deservedly so).

Disasters like these give tech investing a bad name… bad enough, in fact, to keep many individual investors at bay.

Don’t make that mistake. The tech sector is one of the greatest creators of new wealth in history – and will be for decades to come.

You just have to know where to look … and how to find the winners.

That’s why it’s so critical that you do what I do – ignore the Noise and focus instead on the Signals that potential winners send out… before they begin their explosive surges.

These Signals are the fundamentals you should be looking at, thinking about and studying on a daily basis.

Even here the “experts” will attempt to dazzle you with their brilliance – and baffle you at the same time – by citing a laundry list of fundamental ratios, indicators and signals.

This is just more Noise. Ignore it.

The reality is that there are three signals that will let you separate the prospects from the suspects on any list of tech stocks you might be looking at. And they are:

  • Profit Margins (often shortened to “margins” in investor parlance).
  • Return on Equity (ROE).
  • And Return on Assets (ROA).

Let’s take a look at each of these three “quick-check” signals. And let’s start with profit margins – what your boss or your accountant might refer to as the “bottom line.”

Profit Margins are just that – what’s left over after the company pays all its expenses, and all its taxes. Over the past 30 years, profit margins for U.S. firms have averaged 7%. Higher is always better, but we’d like to see a firm at least hit that benchmark.

It’s also vital to look at “Operating Margins.” This excludes such items as amortization and tells us how well a high-tech growth firm controls costs as it expands operations. The number here is simple – operating margins should be higher than those for net profits.

Return on Equity – the second of our three signals – shows us how good a job the CEO is doing for the company’s shareholders. For most of the 20th century, the average ROE for U.S. stocks was 10%. Except for special situations, we want a stock that at least matches that number. Again, higher is better.

The third, and last, of our quick-check signals is Return on Assets. This tells us how good the company is at investing in factories and the equipment that goes inside them.

We’d like to see a minimum ROA of 5%. Anything less means the firm is spending too much of our money on gear that generates little in the way of additional returns.

Now let’s look at a company that has all three of these covered – InterDigital Inc. (NasdaqGS: IDCC).

You’ve heard me say in the past that the Mobile Wave is a red-hot sector. Well, InterDigital is a mid-cap leader in mobile technology. And leaders are what we look for.

IDCC not only has great technology … it also has a patent portfolio that most of its rivals would kill to own. That’s because these patents are like a gator-infested moat that protects IDCC’s business by serving as a “barrier to entry” for any would-be rivals.

And our quick-check signals confirm this view. It has a profit margin of about 41%, and an operating return of 65% – both well above our thresholds.

It checks out fine with our other two signals, as well: its ROA is 26%, and its ROE is better than 50%.

Clearly, this is a potential tech-market wealth-builder that we’d want to look at. Ironically, not long ago it was the victim of market noise itself. The stock started selling off sharply in 2011 and the carnage continued for months.

Even now some of the experts continue to dismiss this stock – just as they did with eBay a year ago. They’re predicting an average price of $40 a share for IDCC – even though it’s trading 8% higher than that right now.

Oh, and it’s up 20% during the past six months.

So, once again, it paid to ignore “The Noise” and follow the signals. Because those signals tell us that InterDigital is a quality company in a high-growth venue in tech.

In my next column, I’ll tell you all about Rule No. 3 on my list of Five High-Tech Wealth Creators. It’s a rule I learned long ago from an insider whose name you might recognize.

You won’t want to miss it…

16 Responses to The Second Rule for Grabbing Massive Tech Profits

    • Michael Robinson says:

      Hi Dean, I hope to have one out on Friday but it may not be till Tuesday. Either way, one is coming soon. Thanks for checking in.



  1. Mat Cendana says:

    I’m in Malaysia and only follow the stocks in the US, not buy them (maybe “not yet”). I also follow the commodities market. But I like your articles and pointers because they are fundamental and should be valid anywhere.

    I’ll keep in mind this “noise” factor. It’s the same everywhere with some national media or blogs being very influential in shaping the general opinion. Yes, they have been right but this is often cancelled out by their wrong calls (which they often ignore or make light of). Percentage-wise, I might be better off making my own calls.

    • Michael Robinson says:

      Hi Mat,

      You are on the right track, that’s for sure. Many investors can make most, if not all, of their own calls. I’ve found, however, in the long haul it pays to have a “guru” or two in your corner.

      By that I mean someone who is deeply steeped in the field of investing of interest to you. The main thing is to limit your sources to a bare minimum of those in whom you trust because they tell it like it is and they have great track records. I do hope you will check back here for more insights on building wealth through tech.



  2. John Gueli says:

    For those who missed rule #1 like me, suggest you provide access to all your previous rules. Looking forward to allow your good info.

    • William Patalon III says:

      Hi John:

      We spotted your query and Michael asked if I could get an answer to you. The two prior columns in this series — the original introduction, and Rule No. 1 — are available here on this Website. Just look in the archive under past articles … they’re all there. That was Michael’s intent in putting this together — to give his readers access to the insights that he uses to pick his tech-stock winners.

      As the executive editor here at Money Map Press, I can attest to the fact that Michael has quite a gift for this. One of my functions here is to run a daily trading service known as “Private Briefing.” Michael has shared recommendations with my readers that have been generated some very hefty returns … in a very short period of time. The eBay example he cited here was just one of many that my subscribers have enjoyed.

      And I know that he’s had some even bigger winners for his Radical Technology Profits research service.

      Take a look in the archives. If you don’t find what you need, let us know and we’ll help you find those articles. We’re glad to do this … and want you to have the insights that you seek.

      Hope that helps. But please let us know if it doesn’t.

      And thank you again for taking the time to comment…..

      Respectfully yours;

      William Patalon III
      Executive Editor
      Money Morning and Private Briefing

    • Michael Robinson says:

      Hi John,

      As of this writing, Rule No. 1 is still listed on the home page. So, please start by checking there. If it moves, you will find it still on this site on the Archives page for the month of March.

      Hope that helps. Cheers,


  3. steve says:

    Thank You Micheal for reminding me why I am an investor in IDCC. I have owned it for quite a while and sometimes wonder if I have too big of position there. I bought in at about 34, and it’s just shy of 45 today, so I wonder if it is time to sell a third and take a little profit, but based on your reminder , I think I’ll hold a little longer, in hopes we will see a previous high again. I also have a too big of stake in VHC, which recently got clobbered because of the CISCO lawsuit. I am going to hold there also . Thank You for you keen insight. steve

    • Michael Robinson says:

      Hi Steve,

      Congrats on the nice gains on IDCC. As regards taking gains on stocks, I can’t provide advice to any individual investor as I am not a registered broker dealer.

      However, I will say this: it really pays to be a disciplined investor. By that I mean every one of us needs to have a set of rules that work for us and that we follow regularly.

      There is an art to taking gains that I will be talking about in the near future. One of those is to protect profits with trailing stops. I do that by using set percentages or by looking at the charts regularly.

      Either way, you sound like you are doing well. I do hope you will check back here as I will have more tips and insights to share with you.

      Good luck and happy investing,


  4. XU PINGQING says:

    Today, for the first time, I have read carefully your Rule No.2 of Tech-Wealth Builders with great interest, it is informative financially, and has refreshed and updated my mind&memory financially and technically. I would be your sincere reader or diciple.because I want to be wealthy ASAP.

    • Michael Robinson says:

      Hi Xu,

      Now that’s the spirt. I hope you will read the rest of the rules that will be running over the next several columns. I have these principles over many years of investing in tech and analyzing key trends in the industry. I do hope you become wealthy.

      Cheers and best wishes,


  5. Dario C says:

    I have been studying the stock market for some time now, having the freedom to do so in my retirement years. The conclusion I have come to is that stock prices have nothing to do with the actual value of the company or how well it conducts it’s business. The price of stocks is controlled by what the “big boys” do.
    They have instant information availability, and control the prices by dumping huge amounts of money on their pick of the day, unlike the small investors, who usually get in on the trend towards the last part of the run upwards and with great regularity do not get out soon enough.

    The stock market today is not INVESTING, it is gambling, and even solid dividend paying stocks are a marginal idea because the small percentage dividend profits can and often are wiped out by the horrific swings in stock prices caused by the market controllers.
    Yes, sometimes small investors make out like bandits, I am an example myself, but it is more often than not a result of a little insight coupled with a large amount of luck.
    That being said, the entire process is really interesting to watch, and provides unending amusement.


    • Michael Robinson says:

      Hi Dario,

      Well, I am glad to see that you are a studied investor and that you are doing well. However, I don’t quite share the same opinion as you. I often uncover gems that provide excellent profits and have built up a track record to that effect.

      What’s interesting to me is that for the most part I just ignore the “big boys.” As someone with an honors economics degree, I look for the classic equation of supply and demand. You make a good point that some stocks go down despite great fundamentals.

      That’s often because one or two major institutional investors are bailing on the stock so they can take profits or because they have lost faith in management. This can be a tough period because it may take many weeks for them to unwind. Those events are out of your control but you can use investing rules and tactics to protect yourself.

      On the upside, you want to find stocks, particularly small caps, that the institutions are buying because they are so big they bid up the price. And we pocket the profits!!

      Thanks for sharing your thoughts with me.

      Cheers and best wishes,


    • Tom says:

      Hello Dario;
      To a degree I agree with you about the market, BUT, as I see it what is necessary is to use the market as it is now and diversify in other types of investments (profitable yet dependable ones). For that I have moved into royalty interests.
      If the market was to drop to ZERO, my royalties will continue to produce for the next 20+ years with substantial monthly distribution’s.

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