Dan Benton's Rules for Technology Stock Investing, 2026 Edition
Technology Investing, 1985-2026
In 1991, I published my Rules for Technology Stock Investing. Thirty-five years later, people still remember them. They’ve shown up on Twitter and Medium on old Goldman Sachs letterhead, and I’m told they’re tacked on cubicle walls in pod shops everywhere.
Since leaving Goldman Sachs in 1993 for the hedge fund world, I’ve thought about revising the rules many times. But there’s never been a deadline and I’m a terrible procrastinator. Now, with a little help from ChatGPT, I’m finally publishing an update.
After graduating from business school in June 1984, I joined Goldman Sachs in the Investment Research Department. Following a short training program, I was assigned the Specialty Chemicals industry because Goldman didn’t cover it and it was an Institutional Investor category. I cannot imagine where my career would have gone had I stayed there.
As luck would have it, my research director remembered that I had been a computer consultant between college and business school. The department hadn’t rolled out PCs, so the partners asked me to write a plan to adopt the new technology. I proposed a $300,000 budget to equip all the analysts and assistants with a desktop computer. Which they rejected because I couldn’t measure the ROI. I kid you not.
But Mike Armellino, a partner and Goldman’s top-rated Railroads and Airline analyst, took notice. And when he was promoted to co-head of research a few months later, he offered me the mainframe industry. I gladly accepted, along with coverage of the fledgling PC sector.
By the late 1980s, Goldman had the top-rated II technology analysts on the Street. I covered PCs, disk drives, and mainframes. John Levinson covered minicomputers and workstations, and Rick Sherlund followed software. We were a powerhouse team.
Sell-side analysts served many masters. Companies wanted favorable coverage. Bankers wanted relationships, Sales wanted ideas, Traders wanted to know why stocks were moving today. Only the buyside was genuinely interested in my stock picks and rationale. That’s where I focused my attention.
One of my talents is forecasting earnings – a former CFO of Apple once told me I predicted their quarterly earnings better than she did. I built integrated financial models in Excel, tying together a company’s income statement, balance sheet, and cash flows. That doesn’t sound revolutionary today, but remember we just got PCs in 1985.
In those days, companies didn’t hold quarterly conference calls or offer earnings forecasts. Sell-side estimates varied widely. I spoke to management teams, combed through company filings, and gathered information from suppliers and customers. I built revenues from individual product lines, forecast margins based on component costs, and estimated expenses from headcount projections. When I was out of consensus and right, the stocks moved. Sometimes for weeks.
Back then, you could have an information advantage. You could speak with management beyond the CEO, CFO, and IR. It wasn’t about inside information, it was about strategy, tactics, execution, competitors and suppliers. And yes, “How’s the quarter going?”
There were more sell-side firms than today, but the buyside was more concentrated in long-only mutual funds and pension funds. No ETFs. No same-day options. Very few hedge funds. No social media. No internet(!). Earnings releases arrived by fax, and you called management to get on the callback list. No cell phones, you ran to a payphone to call the desk with news from an analyst meeting.
And I was in my early thirties. A quarter lasts a lot longer when you’re in your thirties than in your sixties. You bought and sold stocks in advance of earnings. A long-term holding was a company that beat estimates for four consecutive quarters.
I began my career at the dawn of the microprocessor era. Mainframes and minicomputers gave way to PCs, semiconductors, peripherals, software, client-server architectures, and networking. The industry reinvented itself repeatedly, on an ever-shortening cycle. Over forty years, I’ve learned that identifying secular themes is the most important rule of all.
Despite all the changes in the financial industry since then, it’s remarkable how well the old rules have held up. Expectations still drive stocks, acceleration still creates operating leverage, and value investing still doesn’t work.
In 1985, you could have an information advantage. You could talk to management, customers, and suppliers and build a mosaic that others didn’t have. Estimates were widely dispersed.
The information edge is now zero. Dissemination is instantaneous. Companies guide, transcripts are published in real time, AI reads press releases before you do. There’s a whisper number. And a set-up.
Looking back at the largest companies by market cap, the tech industry was tiny. Essentially, it was IBM, AT&T and a collection of mid-caps. Energy, conglomerates, and industrials were dominant. Tech valuations were low and everyone owned IBM.
Technology was a sector back then. Today it’s the market. Tech drives index performance, capital spending, energy demand and even geopolitics. Thirty-five years ago, you could ignore the macro. Now you can’t.
Now there is only analytical judgment and temperament. If we evaluate our portfolio through the lens of secular themes and remain patient through volatility, we will do well.
With that preamble, I present the old and updated rules below:
Dan Benton’s Rules for Technology Investing (circa 1991)
Momentum
Sell technology stocks when estimates are being reduced.
Buy technology stocks only for positive earnings surprises.
Positive earnings surprises occur when revenue and earnings growth are accelerating, when average selling prices are rising, and when gross margin and operating margin are rising.
Most technology stock ideas are product-cycle stories.
New product cycles often lead to earnings surprises; product-cycle transitions usually lead to earnings disappointments.
Technology stocks also do well when companies rebound from periods of poor execution.
Valuation
Value investors don’t make money in technology. There are few “cheap” technology stocks.
Don’t buy on relative P/E, P/B, P/R, particularly when estimates are falling.
Seasonality
Technology stocks perform poorly in the summer.
Seasonal slowdowns cause secular concerns.
Second-tier companies perform worst in the weakest seasonal periods and provide anecdotal evidence of an industry slowdown.
Management
Reorganizations without restructuring charges usually lead to earnings disappointments within two quarters.
One-quarter problems exist (but only if caused by supply constraints).
Management usually appears weakest at the bottom of a product cycle.
Insider selling doesn’t matter; management receives new stock options every year.
Old World/New World
Traditional mainframe and minicomputer companies are in secular decline.
It is increasingly difficult to differentiate companies that sell microprocessor-based computers.
Execution is the most important distinguishing factor in a standards-based world.
It is hard to forecast execution.
Don’t forget Rule 1.
Dan Benton’s 20 Rules for Technology Investing, 2026 Edition
Don’t trade technology stocks. Invest in secular themes.
Secular growth overpowers economic cycles.
But don’t fight the Fed. Technology is now the market.
Momentum
Secular growth drives acceleration.
Product cycles, platform extensions, and geographic expansion also accelerate growth.
Revenue acceleration creates operating margin leverage.
Technology stocks move in the direction of estimates. Forecast at least two years out.
Invest when your estimates are out of consensus and correct.
Valuation
Valuation doesn’t matter to momentum stocks.
When growth slows, they become GARP stocks and multiples compress.
Seasonality is a distraction. Forget “sell in May and go away.”
Cheap technology stocks usually aren’t. Most turnarounds fail.
Two rocks tied together don’t make a raft, but tech M&A is a risk to a short.
If a short beats numbers for two quarters in a row, you were wrong. It was a long.
Cover shorts when they stop declining on bad news.
Management
All managements try to underpromise. Only the best consistently overdeliver.
Mature companies blame the economy or the dollar.
Stock-based compensation is an expense. Buybacks to offset dilution create no value.
Insider selling doesn’t matter. Buyback announcements accompanied by disappointing outlooks don’t either.
Summary
The market is faster than it was 35 years ago. But it’s not smarter. See Rule 1.
Great to read this DB - I just shared the old rules a few weeks ago with some friends. An investing classic!
great content. Thank you for sharing