With the huge surge in cyber attacks, it’s easy to look at cyber news headlines and not see how a positive spin could be possible. Who besides hackers could possibly benefit from malicious intrusions that result in lots of compromised data? The answer: Bold investors. Cyber security is a big industry now. So naturally, there’s big investment potential for it.
Tech stocks: A volatile history
To lay foundation for a discussion of cyber security stocks, it’s helpful to look more broadly at how some major computer tech-based stocks have performed in the past few decades. Perhaps the most important thing to consider in a discussion of the tech sector is that such stocks initially grew out of a highly speculative period: namely, the 4-year span between 1997 and 2000 called the “dot-com” or “information technology bubble.”
As a January 14, 2004, University of Texas Inequality Project paper entitled “Income Distribution and the Information Technology Bubble” pointed out, the introduction of IT stocks into the mainstream American marketplace was almost immediately characterized by an overzealous nature on the part of investors. Simply put, individuals began overinvesting in IT, a dynamic that was spurred along by a general trend toward increased spending in the late 1990s. Beyond that, though, there was significant pressure being applied from IT companies – and their tech promoters – to consumers to jump on the tech stock band wagon before it was too late.
This, in essence, is the basis of a speculative industry: You hear from “experts” that something has great potential value, and therefore buy into it, literally. In the case of the tech boom, investors were emboldened by the marketing forces at companies like Amazon and Dell, which were sending a message out that buying up tech stocks was a now-or-never thing. Soon, these companies warned investors, IT stock prices would shoot up to cost-prohibitive levels, and investors would wish they’d made the leap when they’d had the chance. And so investors did make the leap – many of them. In fact, so many people bought tech stocks that, according to the University of Texas paper, there followed “a run-up in stock prices that defied logical explanation.”
Not surprisingly, the surge in tech stock prices didn’t only run counter to logic, but also sustainability. Between 1999 and 2000, the bubble began to show signs of vulnerability, and then it burst in 2000. As TIME pointed out, this burst was more like a slow pop during the month of March 2000. During this time, once high-valued companies began shutting their doors (anyone remember Pets.com?). Stock prices sank. Many investors lost tons of money. The dramatic rise of the tech stock sector was followed by an even more pronounced fall, one that helped pave the way for the recession that followed several years later. In the years since, the country has come out of the recession, and the leading tech companies have attained a much higher level of stability than they had in the late 1990s. And yet in terms of stock performance, the tech sector has not lost its inherent drama.
An illustrative example of this is Google. In the 10 years since it added its name to the American market, Google saw its stock rise 1,293 percent. This is an absolutely massive increase, but it shouldn’t overshadow the significant fluctuations to which Google has been prone since its IPO. In 2010, for instance, Google’s stock experienced a 17 percent drop over a period of months, and there was one single day where the tech giant’s stock dropped 4 percent after-hours.
The cyber boom?
Now that context has been laid for the historical performance trends of tech stocks, it’s time to look at the news that cyber stocks are rapidly emerging and attracting investors all over the world.
As a recent Business Insider article pointed out, cyber attacks are rampant, and they’re impacting enterprises of all types. Mainstream media only tends to cover the larger hacks – like the Sonys and Targets – but the reality is that there are many organizational intrusions happening on a daily basis, most of them hitting smaller and less well-defended organizations. But while all these episodes are bad for the targeted businesses, they’re good for another kind of business: opportunistic investors.
And cyber security isn’t just an investment sector that’s confined to people with the industry know-how to intuit which individual companies to invest in. Thanks to broad market products – like the ISE Cyber Security™ Index (HXR) – regular investors can throw their money into a fund that broadly tracks the cyber security sector. Since bursting onto the scene in 2011, HXR has enjoyed a total return of 207 percent, which is a full 123 percent higher than the S&P 500 during that same time frame. Comprised of 30 companies, HXR has been performing particularly well in recent months. Back on December 31, for instance, its price was $246.65. As of June 23, the index was sitting at $316.73. That means if you had $10,000 in the fund at the beginning of the year, you’d be enjoying around $12,800 now. Not bad for under half a year.
But is this growth cause for excitement – or worry? Perhaps a bit of both. At the moment, cyber stocks seem to be performing very well, and this upward trend hasn’t been countered by any major declines. Since its launch in 2011, for instance, HXR has had only minor declines. For the most part, its trajectory has been a pretty steady hill. But as the cyber industry continues to gain traction and cyber-focused stocks follow a parallel path, it’s important that prospective investors temper their excitement with circumspection. If, for instance, a cyber stock is declared “hot” by different media outlets, that should not necessarily trigger an impulse to buy. As always, research and careful consideration – not rapid buying – are the keys to a successful investor, one whose money can withstand an economic event that could cripple more impulsive investors.