What goes down must come up
April 14, 2000
Man, I'm really enjoying what's happening to the Nasdaq these
days. It may be singing the Nasdaq Blues to you, but it sounds like
the sweet scream of an amusement park ride to me.
First of all, I love roller coasters. Especially that
long, stomach-churning freefall at the start of
the ride. Second, I don't own any public
stocks. All my equity is in options from two
private companies, both foolish enough to
employ me. But just wait until those IPOs,
yesiree.
I don?t mean to be smarmy or cruel. By the
volume of hate mail I get, I know that you don't
like hearing anything negative about the future
of tech stocks. Like the fact that the bear
market has finally, officially, arrived.
No 'I told you so's'
I don?t hold a grudge, though, and would never try to remind you
that last December this column called for a big tech stock
correction sometime this year, the likes of which we have never
seen before in the technology sector. No way.
But did you listen to me? Of course not! What did I know? That's
also why I feel comfortable making further observations. You don't
listen to me anyway.
Besides, you've been told many times before what it takes to play
the stock market: Make long-term investments and diversify. It's
just that many folks don't have the guts to leave the Temple of
Quick Profits.
Look at the history of the stock market, and you will see that if you
take a long enough perspective, you are almost guaranteed to win.
In a recent article in Atlantic Monthly, "Dow 36,000", authors
James K. Glassman and Kevin A. Hassett did the calculations and
found that if you had bought a bunch of blue-chip stocks just
before the October 1929 stock market crash -- probably the
worst time to buy stocks in history -- you still would have
recovered all your losses by the end of 1944 if you just held onto
them. By 1960, those stocks would be worth nearly 10 times what
you paid for them.
Patience pays off
Granted, that is a very long time to wait for a return. But if you had
been brave enough not to dump your stocks, but to actually buy
even more after the crash, you would have lowered the average
price per share you paid, and you could have done very well in a
much shorter time frame.
As the authors note, "From 1933 through 1936 stocks enjoyed
their best four-year period in history, tripling in value."
In the stock market, if you're diversified and hold on long enough,
what goes down must eventually come up. For all I know, by the
time you read this, Wall Street may be rallying again on tech
stocks.
I've been waiting for the Nasdaq to dip below the psychological
barrier of 4,000 before recovering. I do not know exactly when
that recovery will begin, but I doubt the Nasdaq will reach 3,000
again.
What goes down must come up
page 2: Cow stocks
So much for the good news. The bad news is that some of those
stocks you?re holding may not be blue chips, but more of the cow
variety. They may not recover. Here's my new guess and hope:
This bear market will result in a shakeout. If the losers are part of
your portfolio, the longer you hold them, the more you lose.
Love those market leaders
How do you tell which is which? I am not really qualified to make
particular stock recommendations, and I'm not sure I would listen
to me if I were you. But others have already pointed out the
simplest approach: Focus on the market leaders in each category.
If you don?t think Microsoft (MSFT) is going to be permanently
crippled by the Department of Justice, it could be a good buy.
At this point, I would not invest in those companies that lose
money on every sale but plan to make it up on volume. The VCs
are getting impatient with them, and their cash on hand will not last
forever. When the cash is gone, the company will follow -- into the
arms of a suitor if you?re lucky.
I hope the recovery does not really get under way until some of
these companies are driven out of business. Some of them had no
business going public in the first place.
Cull the weak
I do not believe that this whole Internet stock rush was just a
bubble. But there were a lot of companies taken public by
bubble-headed investment bankers. My vote: let?s cull the weak
ones from the herd before we start bidding the whole group up
again.
When we look back on the last few years, I hope that what we see
is that Internet over-enthusiasm lured a many entrepreneurs,
investors and bankers into losing sight of reality for awhile and
betting on too many losers.
The recovery, however, can be a time for wiser investments in
more solid companies. Then the NASDAQ can work its way back
up on a firmer path. Forget a 5,000 Nasdaq, I expect to see it at
10,000 well within a decade.
In the meantime, hold on. My gut says that this is just the beginning
of the Nasdaq roller coaster ride. I just hope you aren?t riding in
one of those rear cars with a faulty grip on the Nasdaq train.
Richard L. Brandt is senior contributing editor at UPSIDE. |
