Fund letter shows getting even in tech will be tough
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: June 17, 2002
Will I ever get even on my technology stocks?” That plaintive cry from investors seems almost universal, and it’s difficult to respond.
I can recount stock market history, which shows that there’s never been a 20-year period in which you would have lost money in a diversified portfolio of large-company stocks. But I cannot tell you that a portfolio that concentrated its investments in a bubble will ever get even.
That didn’t happen after the nursing home stock bubble of 1969, or after the “-onics” bubble of 1970-71 (in which every electronics firm had a big run-up), or the soybean bubble of 1973-74, or after the gold stock bubble of the late 1970s, or after any other historic mania in which one group of stocks or commodity was priced out of all reality by popular delusion.
If history is any guide ...
I can tell you that it’s very unusual for the S&P 500 to decline in back-to-back years as happened in 2000 and 2001. In fact, you have to go back to 1939, 1940 and 1941 to find three consecutive years of market declines. Or back to 1929-32 to find four consecutive years of declines. Odds are, the market should be up this year--but you’re through playing the odds, aren’t you?
What you want to know is when your technology portfolio will get even. And that’s such a tough question to answer that I always avoid it by talking about the long-term positive results of diversified stock market investing. I learned on the trading floor years ago that only losers think about getting even.
So I’m grateful to the current issue of Gerald Perritt’s Mutual Fund Letter for providing the sad answer to readers’ questions about getting even in tech stocks. It takes a tough guy to tell this story, and I’ll use his words to do so.
THE FACT: “From the top of the Nasdaq composite index at 5,048 in early 2000, the index dropped to a low of 1,423 last fall. That’s a decline of 71.8 percent.”
THE MATH: “If the index were to grow at a 15 percent average annual rate, the index would not get back to its all-time high until October, 2010.”
THE FACT: “During the last seven months, the Nasdaq Composite Index has risen by 22 percent.”
THE MATH: “If you invested $10,000 in technology stocks at the Nasdaq peak, that investment would have shrunk to $2,820 last October. A 22 percent rebound in the value of that portfolio translates into a $621 gain, a mere 6.2 percent of the original investment.”
It’s not just the math that’s working against you getting even. It’s the psychology. As Perritt points out, there is an overwhelming number of technology investors who are just waiting for a rebound so they can get even--or maybe nearly even--and then sell.
So, says Perritt, “stock price rallies will most likely be met with selling waves that tend to cut the rallies short. ... In other words, the expectation of decade-long 15 percent average annual returns for technology stocks may be highly optimistic. Although that could happen, we are unwilling to bet our financial future on it.”
Mania doesn’t come back in style, but investors do
The historical truth is that most popular mania investments rarely come back into style; what does emerge is a generation of investors who lack the fear of losses suffered by previous investors. Thus, maybe it’s no surprise that gold funds are leading the pack this year, and were the surprise best-performing group in 2001.
If you can’t predict the future, then the best advice is not to put all your chips on one bet. So, take a fresh look at your investments. Start over. Diversify. Rebalance, taking profits along the way. Look forward, not backward. Try not to make the same mistakes twice.
The lessons that cost the most, teach the most. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to firstname.lastname@example.org. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.