>Aside from making hollow personal attacks on me without pause for two years,
Billy, I saw this article and couldn't but help think of you.
>March 18, 2001
Some lessons get learned the hard way.
It cost investors in high-tech more than $3 trillion to learn that growth stocks can't go on doubling in value each year, that bubbles eventually do burst and that time-honored investment strategies -- diversification, valuation and discipline -- still matter.
Just over a year ago, on March 10, the Nasdaq market, where most high-tech stocks trade, hit a peak of 5,048. It has since tumbled below 2,000, losing more than half its value.
How could so many investors be so wrong?
There are a variety of reasons, including euphoria about the so-called New Economy, wishful thinking that investing could be so easy and, of course, plain old greed.
For investors who rode their high-tech stocks all the way down, it could take five to seven years just to get back to break even, assuming a robust average annual rate of return of 10 percent to 15 percent, says Mark Dowling, a chartered financial analyst and money manager with Dowling & Yahnke in Carmel Valley.
"The real tragedy are middle-aged investors who got caught up in the euphoria," Dowling says. "Now they don't know how to catch up."
There is no quick and easy way to recover, unfortunately, but there are proven investment strategies that build wealth over the long run, say professional investment advisers:
Diversification -- "The biggest thing is diversification," says Henry E. Zapisek, a certified financial planner and investment adviser in San Diego. "You don't want to put all your eggs in one basket, even if the eggs are golden."
To preserve investor capital, Zapisek uses such ho-hum investments as municipal bonds and General Electric, a large cap heavyweight. "Boring creates long-term wealth, not short-term profits," he says.
Diversifying, or investing in different asset classes, smoothes out both the highs and lows in investing. Investors don't get the dramatic 100 percent annual yields of a high-tech mutual fund in the late 1990s, but they don't get the 50 percent plunge either.
Dowling recommends that his investors have a portion of each of these investment types: money market fund, bonds, large stocks, smaller stocks and foreign stocks.
"It's prudent to be diversified," says Mark Petrie, portfolio manager at Hokanson Capital Management in Solana Beach. It can help put investors in place for the run up in the next hot sector.
In the late 1990s when high-tech stocks were doing well, money was essentially sucked out of other kinds of stocks and invested in tech. Now some of these sectors are recovering, like health care, financial services and auto suppliers.
Valuation -- "In the end, it does matter," Petrie says. Eventually the real value of a company will help determine its worth to investors. If a company has no profits or, worse yet, no revenues and doesn't live up to its promises, investors will one day stampede for the door.
Even a good company can be outrageously overvalued. At the height of the frenzy, Cisco was trading for 300 times its earnings, Dowling notes.
Its stock price has been cut in half, to about 50 times earnings, which implies great future earnings. The company will either have to grow into its price or the price will come down.
Successful investing boils down to finding good companies with good management. "A lot of investing really is common sense," Zapisek says.
Willingness to sell -- The remarkable performance of tech stocks made investors more unwilling than usual to sell and take their profits, advisers say.
"No matter what tech stock you bought you couldn't lose," Zapisek says. No one seemed to give any thought to a sell discipline, he says, but "sometimes you have to take money off the table."
The exciting stories of quick riches and the prospect of paying taxes on the gains, Petrie says, "left people with this belief that it wasn't worth while to cash in."
Petrie says his firm trimmed back on stocks when they hit certain price targets, to keep a few stocks from comprising too big a portion of a portfolio.
Skepticism -- Understand that Wall Street is in the business of selling and that investment experts can get as caught up in the market as anyone else. Many stock analysts cheered as stocks made their way up, then did nothing to warn investors on the way down.
Analysts tend to be biased toward stock buying because their brokerage companies want to curry favor with publicly held companies to obtain their lucrative underwriting business. "Be leery of the advice from brokerage firms," Dowling says.
When monitoring the market, Petrie advises, "Pay attention to the news, but not the hype."
Realistic expectations -- When the skyward prices of tech stocks seemed to have no limits, it was easy to be swept up in the exuberance.
"Plenty of advisers got caught up in it," Zapisek recalls. "Even I felt, 'My god, I'm missing out.'
"
With such extraordinary gains, investor expectations got out of whack. "A lot of people expected their portfolio to grow 20 percent a year," says Petrie says. History shows, however, that stocks average about 11 percent returns annually.
Now investors are succumbing to the same unrealistic expectations in reverse. That is, if the market was that bad last year, it will be equally bad this year.
"People get scared and leave the market just when these stocks become reasonably priced," Petrie notes.
There's nothing wrong with investing in technology because it's a big part of our lives, advisers say. Just don't get carried away.
Zapisek, noting that the economy is still strong, still sees a future in high-tech and growth stocks. "Long term," Zapisek says, "it's good to be buying at these prices." |
