Here's an interesting read this morning:
Friday October 13, 7:00 am Eastern Time
Morningstar.com
RevisionistHistory.com
By John Rekenthaler
Now You're Telling Me
Did you notice how many market commentators are beating a nearly expired horse? Flip to CNBC, and you'll witness a litany of Wall Street
experts gleefully pronouncing how investors have finally recovered their sanity, now that those absurd dot-coms have plunged straight into the
drink. Everybody nods sagely in response.
Don't give these bozos your respect. See, I remember 1999. I remember moderating a panel of university professors who universally trashed ``the Internet bubble,'' to the
bemusement of a less-than- enthusiastic audience of financial professionals. I remember all those enthusiastic dot-com research reports, issued by the very firms that employ
today's naysaying pundits. I remember all those portfolio managers shedding their inhibitions and adding Amazon.com (Nasdaq: AMZN - news).
Most of all, I remember that when TheStreet.com's Jim Cramer crapped all over value manager Dave Dreman this past winter, mocking Dreman's recommendations of
Albertson's, First Tennessee, US Bancorp, Washington Mutual, WellPoint Health Networks, and Litton, few jumped to Dreman's defense. Most professional observers agreed
with Cramer's thesis that value managers were hopelessly outdated in the new millennium. In aggregate, Dreman's six stocks have enjoyed a modest- sized gain since Cramer's
mid-February bashing. Can Cramer make the same claim? Can you?
Collectively, the market's observers failed. The dot-com companies formed as obvious a bubble as any of us will ever encounter in our whole, entire, bathetic existences: currently
unprofitable and utterly unproven business models, extremely high prices, and clear signs of investor speculation. Yet how many investment experts stood up and called the mass
hysteria for what it was? Very few--me included. (I pecked away with various skeptical notes, but stopped short of issuing a flat ``sell.'') Remember that the next time somebody
tells you they have the markets solved.
The Silver Lining
Technology mutual funds are, of course, in the hole for the year 2000. They are, however, comfortably ahead of both the Nasdaq Composite and Nasdaq 100 indexes. This news
surprised me. Unlike the indexes, the funds presumably haven't helped their cause by diversifying into health-care stocks. In addition, in this day and age, few funds hold much
cash. So asset allocation hasn't been the funds' savior.
The secret, it turns out, lies at the very top of the indexes: top holdings Microsoft (Nasdaq: MSFT - news) and Qualcomm (Nasdaq: QCOM - news). In January, these two
stocks combined to make up 18% of the Nasdaq 100. Their share of the technology mutual- fund wallet, though, was just 6%. Since those companies have fallen about 40
percentage points further than other technology stocks, this simple difference has given mutual funds an extra 5 percentage points of performance.
Is such the nature of indexing? Because indexes are market-weighted, one might argue, they hold the largest amount of the most-overvalued companies, and therefore tend to
decline the furthest during a downturn. It sounds good--and it's a case that occasionally gets made. I don't know. By this logic, the next three companies on the list, Cisco (Nasdaq:
CSCO - news), Intel (Nasdaq: INTC - news), and Oracle (Nasdaq: ORCL - news), should also have been overvalued and due for a drop. However, they've held up pretty well.
Chalk it up as a singular event, pending further investigation.
Etc.
At heart, I'm an optimist--which is why I own almost nothing but stock funds. My courage wavered, though, upon reading that Wall Street Journal columnist Jonathan Clements
received not a single dissenting vote when he wrote, ``Maybe stocks will never revert to historic norms, where shares trade at 14X earnings and yield 4%.'' Ouch! What a
devastating contrarian indicator\205
I now automatically flip channels when I hear a football announcer solemnly intone that one team is ``wearing out'' its opponent by controlling ``the time of possession.'' Time isn't
the point, gentlemen. It's about the number of plays. Out-of-bounds plays take up five seconds and inbound plays consume 40 seconds, but they amount to the same thing, right? |
