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Consumers Might Love Tech Trends, But Do They Make the Best Investments?

Despite the noise surrounding tech stocks at present, there might be more pertinent long term trends that investors should be wary of. "Technology, it tends to be a good, that is as first stage capital," Brian Yacktman, President and CIO of YCG Funds told TheStreet. "So you don't end up having any pricing power in the industry. I mean, think of just like laptops as something that are way cheaper, but the productivity keeps getting better. You have a lot of competition. People jump in and they drive everything down to the cost of capital and then on top of that, your capital intensive [and] these businesses are cyclical." "If your capital intensive to be able to have a high return on equity as a shareholder, you have to leverage up," he added. "If you're going to leverage up and your cyclical, you're in a very vulnerable position." Yacktman explained that this is a reason why he avoids technology hardware plays, particularly chip stocks , in his portfolios. Essentially, what makes technology more accessible and commonplace for consumers, is not the best dynamic for shareholders betting on these stocks. Instead, he suggested non-hardware oriented tech stocks. "Google : it's the advertising industry. When I was talking about industries being in decline, Google actually plays in an industry that's not been in decline over time because advertising is a relative good," he explained. "Advertising revenues as a percentage of GDP has actually remained remarkably stable over time whereas almost every other industry declined over time, getting cheaper as a percent of our budgets." He cited Facebook as a similar stock that plays into the overall economic trend. However, for more risk averse investors looking to avoid the constant barrage of news shifts, he suggested looking outside of tech entirely. "I think one of the best examples to share as Moody's ," Yacktman said. "So long as there's people that want to have their debt, there's business in the world, they want to lower their cost of debt, they're going to turn to Moody's or S&P or Fitch." He noted that the cost of rating debt is controlled given the lack of competition and the trends in corporate debt should be able to sustain the businesses for a long period of time. Additionally, the risks to the business model showed themselves resilient to even the heavy criticism aimed at them during the great recession, suggesting a strongly stable business. "They have pricing power to be able to continually raise their prices over time and even if they only maintain their pricing at seven basis points, they're basically acting as a toll taker on GDP because as business and GDP grow, so does that issuance and then reading that debt," he concluded. For more on tech stocks and the best places to deploy capital currently, check out Real Money for full portfolio strategies here.

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