Investing in Tomorrow's Products

THE classic way to grow rich is to get in on the ground floor of a new product not necessarily by making it or selling it, but by investing in it. You do not have to be an Eli Whitney or an Alexander

Graham Bell to invest profitably in the products that will create the fortunes of the future. What you do need is information, patience and an eye for the products and processes that can make life easier, more efficient, longer or more enjoyable.

Which fields are most likely to produce the next generation of successful new companies? If you ask venture capitalists, business school professors, bankers and owners of small enterprises for their list of the potentially fastest growing areas of the economy in the coming years, they most likely will recommend these:

First, data processing: Bruising competition has brought a series of failures, but many survivors of the shakeout should do well. The future looks bright for those companies that manufacture or service computers and software provided they bring unique products or special capabilities to this crowded field. A number of computer companies, for example, are working on "artificial intelligence" software systems that would enable machines to make decisions, diagnoses and conclusions beyond a human being's capability. Any company that develops such a system would be hugely promising.

Second, health: Americans spend over $400 billion a year on personal health and medical services. One reason for this high bill is that it costs so much to stay in a hospital. So there will be plentiful opportunities for making, selling or servicing medical equipment for use in the home.

Third, genetics: Some of the best possibilities for smaller firms in this area are in support fields for example, manufacturing lab equipment or producing enzymes for use in genetic research.

Fourth, communications: Opportunities can be great for entrepreneurs who make, sell or service cable TV and satellite transmission equipment.

There are, of course, still more opportunity areas: for example, extracting valuable metals from material before disposing of it, or helping companies become more productive and efficient. For a really far out investment, you can put some cash in space companies. Private firms are beginning to launch extraterrestrial projects. You can buy stock in companies that already have earthbound businesses but are planning space ventures. Or you can contemplate investing in one of a few space only companies that are now privately held but plan soon to go public. Most opportunities at present are in the dozens of space firms that seek money directly from individual investors, and promise in return a share of future profits.

In all these areas, you have to be particularly careful when selecting stocks. Few investors know enough about technology to judge whether or not any wildly trumpeted product represents a genuine profit making opportunity.

The worst method for investing is to be seduced by hot tips from unknowing in laws and friends. As one top mutual fund manager warns, there is no faster way to the poorhouse, other than pursuing slow horses and fast women, than following tips in the new technologies.

But a sober and sensible way to invest is to first pick out an emerging field in the new technology and then follow it carefully. Subscribe to specialty magazines and trade journals. Some good ones are Electronic News (7 East 12th Street, New York, New York 10003; $40 a year); Electronic Business (275 Washington Street, Newton, Massachusetts 02158; $69.95 a year); High Technology Business (P.O. Box 2886, Boulder, Colorado 80322; $30 a year); and California Technology Stock Letter (1620 Montgomery Street, Suite 200, San Francisco, California 94111; $270 a year).

Once you have done some homework, you can consider putting cash into those companies that are most effectively pioneering new products. Conservative people might wager 10% or so of their investment money on such ventures; more aggressive types might put in 30% or even 40%.

The most glamorous way to invest in the companies that are turning out revolutionary new products is to buy the shares of firms that are going public for the first time. That is not always easy. Since supplies are often limited, most new issues are offered first to a broker's best clients. But do not despair if you cannot get the crisp new shares on the initial offering. If you like a company, there is no reason not to buy its stock later on. You may even get it cheaper. Many new issues drop below their initial offering price sometime within a year.

Before you buy, learn all you can about a company that is going public. Ask your broker for copies of newsletters that discuss new issues. Among the leading letters, one is New Issues (3471 North Federal Highway, Fort Lauderdale, Florida 33306; $95 a year); and another is Standard & Poor's Emerging & Special Situations (25 Broadway, New York, New York 10004; $180 a year).

Look to see if responsible analysts say the company's product has the potential for capturing a 20% share of a market that itself could grow very large within a decade. Favor concerns that have 20% to 30% annual growth in both sales and earnings over the past several years and that are plowing 10% to 15% of annual revenues into research and development. Above all, read the prospectus. You owe it to yourself to slog through it before you put up a penny. Check out who the company's officers are they're listed in the prospectus and how much experience they have had marketing other products in the same or related fields. Make sure that the underwriters and the venture capitalists who are backing. the firm have sound records of success. If the venture capitalists are not selling their entire stock holdings in the offering that could be a favorable sign that they think the company has a strong future. (For more, see "Your Investments/Stocks: The Pleasures and Pitfalls of New Issues.")

You also can invest in tomorrow's products by buying shares of one of the mutual funds that concentrate on purchasing the stocks of small, promising companies. A sound method of choosing among the funds is to get a subscription to one of the many newsletters that rate mutual fund performance. Two of the best letters are United Mutual Fund Selector (210 Newbury Street, Boston, Massachusetts 02116; $110 a year), and NoLoad Fund*X (235 Montgomery Street, San Francisco, California 94104; $ 100 a year).

Among the funds that invest chiefly in small stocks are the Alger Small Capitalization, Kaufmann Fund, Alliance Quasar Fund and Baron Asset Fund. If you want funds that specialize in high tech issues, you might look at Alliance Technology Fund or Kemper Technology Fund.

Another way to invest is to buy into publicly traded venture capital companies and small business investment companies. They often sell shares that are traded over the counter or on exchanges and use the money to invest in promising new ventures. When you are evaluating them, the best measure of their performance is their net asset value per share of course, it should be rising.