From today's WSJ:
interactive.wsj.com
Tech Stocks Prove
Why They Are Risky
Don't buy on the dip.
When stock prices tumble, I usually whip
out my checkbook and send off another
$100 to one of my stock mutual funds. But
after Monday's 7.64% decline in the
Nasdaq Composite Index, I left my checkbook in the desk.
Why? For starters, this isn't much of a dip. Sure, the Nasdaq composite is
off more than 16% from its high. But it is still up for the year.
More critically, my sense is that many investors have too much in
technology stocks already and these stocks are enormously risky. For
much of the past year, of course, it has seemed risky not to own
technology stocks, because that is where the performance was.
But in truth, many technology stocks are anything but a safe investment. It
seems absurd to have to say this, but I will say it anyway: It is dangerous to
invest in money-losing companies.
"A lot of these tech stocks don't have cash flow, and many of them never
will," says New York economic consultant Peter Bernstein. "In fact, they
do the opposite. They keep taking cash in by selling shares all the time."
That is a dicey proposition. If a company doesn't have
positive cash flow, it can't benefit shareholders by buying
back stock or paying a dividend. The only way
shareholders make money is if somebody else comes
along who is willing to pay a higher price for the
company's shares.
By contrast, with profitable businesses, such as those much-derided Old
Economy companies, "you're not dependent on what somebody else will
pay for your shares for their total value," Mr. Bernstein says. "Cash flow
significantly reduces risk."
Jeremy Siegel, a finance professor at the University of Pennsylvania's
Wharton School, says it is important to distinguish between profitable
technology companies and cash-eating Internet outfits.
"The Microsofts, the Sun Microsystems, the Cisco Systems -- they're all
making profits," he notes. "They'll get hit, but not as hard. The Internet
stocks that aren't making a profit are most vulnerable and are going to be
hit the hardest in a correction."
This is not a popular argument. "You don't get it," some readers will no
doubt complain. "These companies are transforming the world."
Yes, these companies are changing the world. But if these technological
changes are half as fabulous as their boosters suggest, they should improve
profitability across the economy, and not just in the tech sector.
More to the point, you can't be sure that technology stocks themselves will
turn out to be great investments, especially given the current lofty share
prices. Everybody has heard the "transforming the world" story. Maybe
technology stocks already reflect these heady expectations.
Moreover, buying on the dip only makes sense if you are buying the entire
stock market, preferably through some stock funds that give you broad
market exposure. Eventually, as the initial panic passes and profits continue
to rise, the stock-market averages will move higher.
But there is no guarantee that any one sector will participate in a market
rebound. "If you bought the technology stocks in the original 'Nifty Fifty' on
the first dip in early 1973, you would have been badly behind the market
over the next 20 years," Mr. Siegel says.
If you are heavily invested in technology stocks and paid dearly for your
sins Monday, don't compound your mistake by going to the other extreme.
Investors shouldn't abandon technology stocks entirely.
Instead, they should maintain a market weighting, which means having
some 33% in technology. That is the percentage in technology stocks for
the Vanguard Total Stock Market Index Fund, which tracks the Wilshire
5000 index of most regularly traded U.S. stocks.
Want to check on your portfolio's weighting? You could make a good
guess using the latest annual reports for your mutual funds. But you will get
a more accurate figure by firing up your computer, going to
www.morningstar.com and plugging your holdings into Portfolio XRay,
one of the analytical tools offered at the Web site, which is run by Chicago
researchers Morningstar Inc.
If you have more than a 33% technology weighting, seriously consider
lightening up. You will probably still be banking handsome gains. And if
you do your selling in a retirement account, there won't be any tax
consequences.
Where should you move the money? The temptation might be to shift the
cash into a money-market fund and wait for the storm to pass. But if there
was any lesson to be learned from the past decade, it was the futility of
market timing. Many predicted the end of this great bull market -- and, so
far, all have been proved wrong.
Instead, if you are comfortable with your portfolio's stock allocation, move
the money into other stock-market sectors, so that you have a more
balanced portfolio.
"Overall, I'm not unhappy with the market," Mr. Siegel says. "Outside of
the technology sector, I'm very comfortable with price/earnings ratios. The
economy still looks very, very good. Nothing has changed in the basic
reason for holding stocks."
Write to Jonathan Clements at jonathan.clements@wsj.com |
