OK, I've done my bit to stop the bleeding, now it's everyone else's turn...
Background: I sit on the board of a non-profit educational institution with a decent-sized endowment. For some reason, last year they put me on the investment committee. The institution is on a building spree and is in the midst of trying to raise tons of money via capital campaigns, while the endowment has had a sub-mediocre performance for years thanks to a ridiculously conservative bias during the boom. Just before I joined the committee, they had voted to switch the equity portion of the endowment from managed funds to index funds, split along the usual lines.
Given all this, at a meeting late last fall I suggested that in order to boost our performance we place a small portion of our equity funds into the Nasdaq 100. This was met with hoots of laughter--well, the closest thing to hoots of laughter one can get from a bunch of ultra-bearish sourpuss financial professionals, which means patronizing snorts of contempt.
As the winter progressed, of course, my suggestion didn't look so crazy, and I was invited to make a new pitch at the next meeting--which happened to be this evening. Doing my best to sound sober, serious, and calmly confident (I was kind of trying to channel Merlin), I presented the following:
The Case for QQQ
"The starting point for my analysis is the relative performance of the Nasdaq Composite, and particularly the leading players within it, versus the rest of the market over the last year and a half (see charts).
[here I showed them the following:]
siliconinvestor.com
siliconinvestor.com
siliconinvestor.com
"Two possibilities exist: either there is a giant bubble (which is now beginning to burst), or the market is onto something.
"The most sensible approach, it seems to me, is for [institution X] to play all the angles, including the possibility that there just might be something to the 'new economy' craze. The best way to capture some exposure to the 'new economy,' however, lies not in traditional market indices and divisions (small cap/large cap, growth/value), but in direct exposure to the leading cutting-edge technology companies. The best way to do this, in turn, is through QQQ, a market-cap weighted index of the top 100 companies on the Nasdaq exchange that will continue to reflect the cream of the technology sector going forward.
"Many are concerned about what they perceive as the excessive valuation that many of these companies have attained in recent months, and to some extent such concern is legitimate. It is extraordinarily difficult, however, to accruately value cutting-edge technology companies in sectors undergoing hypergrowth according to traditional metrics--not because 'earnings don't matter,' but because of the profound ways the economy might be changing, the speed with which certain sectors are growing, and the peculiar nature of the 'locks' that certain companies can have within these sectors. Many technology investors, therefore, have come to accept both unusually high valuations and unusually high volatility as the price to be paid for exposure to the unique growth opportunities these companies can provide.
"If we invested in the Nasdaq 100, we would be incurring declines of 10%, 20%, and possibly even twice that on a fairly regular basis in the months and years to come. The upside potential, however, is even greater, and could well result in compounded gains over time that, as in the recent past, will dwarf those of the more traditional indices and turn a relatively small investment into a large one in just a few years."
Well, after some heated discussion, they bought it (not least because some of the fiercer bears had left the meeting before the vote). So tomorrow the institution is putting 1% of the endowment into QQQ, and god help me if we're all nuts and this really is the beginning of the end!
tekboy/Ares@silvertongueddevil.com |
