From this morning's Washington Post business section....
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Pros Are Quicker Than Individuals To Dump Losers
By Jerry Knight
Monday, March 19, 2001; Page E01
The most amazing thing about watching the stock market relentlessly ratchet down for the past 12 months has been seeing how utterly unwilling Washington investors are to bail out of falling stocks.
They have learned, perhaps too well, the golden rule of making money in the market: Invest for the long term. Don't try to jump in and out of the market. Over the years stocks produce annual returns of 10 percent to 11 percent, significantly better than other investments.
Over the years, yes, but not over the past year or so.
The Standard & Poor's 500-stock index, the best overall measure of the market, fell a little more than 10 percent last year and is off almost 13 percent this year. It has been widely predicted that the index will decline further.
Nasdaq stocks, of course, are horribly worse, down more than 60 percent, on average, from their peak about a year ago. Lots of Washington technology stocks have fallen more than that. When the tech traumas are balanced against more successful sectors of the local economy, the local stocks are off their peaks by an average of 28 percent as measured by The Washington Post-Bloomberg regional stock index.
Yet when a team of reporters from The Post went out to take the temperatures of individual investors last week, they found folks are anything but feverish to sell. Mutual fund investors aren't cashing out. Tech stock holders are determined to tough it out.
Take Bowie photography-business owner Robert Blair, who told reporter Sara Kehaulani Goo that a year ago he had a million-dollar portfolio flush with some of the top tech stocks: Intel Corp., the giant of computer chipmakers; and Maryland's fiber-optic twins, Ciena Corp. of Linthicum and Corvis Corp. of Columbia.
Ciena and Corvis are leaders in fiber-optic communications gear, but the companies that buy their hardware are cutting purchases, so investors have slashed their stock prices.
Corvis has fallen to $8.41 from $108, and Ciena to $52.81 from $149, so Blair's $1 million is more like $300,000 today.
"I'm one of those who kept thinking it was going to come back," he said.
Not to pick on Blair, but while he has been hanging onto Corvis and Ciena, the professional investors who hold the vast majority of the stock in those companies were selling aggressively. Bloomberg News reports that institutional investors have sold 10.9 million shares of Corvis since it went public last August.
Institutional sales reports for Ciena show listing after listing of big sales last year: Provident Investments, 1.2 million; Nicholas Applegate Co., 1.1 million; Bowman Capital Management, 1.8 million; Essex Investment Management, 1 million; J.W. Seligman, 1.6 million; PIMCO Advisors, 1.2 million; Morgan Stanley, 600,000; Mellon Bank, 670,000; TCW Group, 655,000; TIAA-CREF, 537,000; and many more.
Corvis and Ciena are good companies, good long-term investments and probably good buys at today's prices. But riding them all the way down from their peaks was not a good move. Nor is counting on them to rebound to where they were.
The institutional selling is one reason why Corvis and Ciena stocks have fallen so far. Professional investors, some of them no doubt working for the same firms who preach the "buy and hold" sermon, don't practice that theology.
Instead, institutional traders have favored the "momentum" strategy: buying stocks that are moving up dramatically and dumping them as soon as they falter. Fundamentals don't matter, the "mo" is the message.
Even institutional investors who pick stocks based on their analysis of a company's products and finances follow another rule that is rarely learned by individual investors: The first loss is the best loss.
In its simplest form, that principle simply means using "stop loss orders" that tell your broker to automatically sell a stock if it falls a specified amount -- 5 percent, 10 percent or 15 percent, for example. There are more sophisticated formulas for signaling when it's time to sell highly volatile stocks such as Ciena, which has been known to drop 5 percent, or even 10 percent, in a day, then rebound just as quickly.
Over the past few years, small investors abandoned such defensive strategies because they grew comfortable with volatile markets. When one of their hot tech stocks sank, they shrugged it off. "It'll come back," they said. "It always does."
Make that "always did."
The "it always comes back" rule has been repealed for Internet stocks and most of the telecommunications industry. For a lot of other tech stocks, it has been amended by adding "maybe, eventually."
Is the Nasdaq Stock Market composite index coming back to 5,048, where it was 54 weeks ago? Maybe, eventually. Maybe not. If all those money-losing Internet and telecom companies whose stratospheric stock prices were based on assumptions of astronomical growth actually deliver, Nasdaq could go back to 5,000. By then, Wall Street could be flooded by ocean waters rising as the result of global warming.
With a year of hindsight, the Nasdaq at 5,000 looks like a classic bubble, a collection of overinflated stocks. Nasdaq prices were driven by greed and self-delusion, not the true value of the businesses. A new generation of investors has learned that lesson.
Never is a long time. But for hundreds of dot-coms and telecoms now skidding toward bankruptcy, it's an accurate approximation of when their stocks will regain their heights.
Yet many individual investors are holding onto those stocks, determined to "ride it out or ride it down." A better strategy, suggests Bill Appleby of Columbia Financial Advisors in the District, might be to sell the stock, take a tax deduction to offset profits on some successful investments and then reposition yourself.
You can wait 30 days and buy back the same stock, or buy another company in the same business. After Motorola Corp.'s big drop, he suggested, you could sell that stock and buy Nokia OY, the Finnish company that also makes cellular phones and isn't doing as badly as Motorola.
Many investors who still believe "it'll come back, it always does" also continue to advocate another strategy that made sense when that rule still applied.
"Buy on the dips," they say. "When stocks go down, there are bargains to be had."
Yes, there are, but not all depressed stocks are bargains.
That's one of the cautions repeated in interviews last week with a half-dozen Washington money managers, professionals who put together portfolios for individual investors and institutions.
Cheap can still be too much. "You can overpay for the best things," said Daniel Abramowitz of Hillson Financial Management, a Bethesda hedge fund.
Some stocks -- and by some measures the whole market -- are still overvalued, they noted. The value of the S&P index historically runs about 14 times the combined earnings of the 500 companies. Even after recent pullbacks it's now at 20. In recent recessionary markets, the price-to-earnings ratio of the S&P has fallen as low as 10.
Investors who are holding onto stocks they figure have nowhere to go but up ought to recognize that those numbers show plenty of potential downside. Most members of my impromptu panel said they expected the market to fall further -- and that was before Friday's big slide.
Picking the bottom is impossible, they also agreed. And with varying degrees of caution, they say the only way to get the full benefit of any market rebound is to take the risk of buying stocks before they hit bottom. When and how aggressively to move is the issue that creates a spectrum of opinions across the six money managers.
Appleby is the strongest advocate of buying now. And all agreed that with stock prices down so much, there definitely are values to be had.
Susan Stewart of the District's Charter Financial Group and Randall Eley of Edgar Lomax & Co. in Springfield said they have recently acquired stocks that they previously considered too pricey.
Fred Burke of Johnston Lemon Asset Management and Praba Carpenter of the Growth Fund of Washington, an affiliated company, are at the more cautious end of the scale. Burke has built up his cash, avoiding losses, preparing to buy.
A year ago, one of his biggest holdings was Cisco Systems Inc. He made a lot of money on the stock by selling it before it crashed and still likes the company. But with Cisco down from around $80 to around $20 and continuing to fall, he's not quite ready to jump back in.
If you see a stock you like, start buying, Carpenter suggests, but don't buy all the shares you want at once. Ease into it.
The specific stocks the money managers are finding aren't as important as their selection criteria.
To paraphrase the panel: Buy the best. Look for market leaders. Look at balance sheets. Look at book value. Look at profits. Don't look just at how much the stock has been marked down.
Rapidly growing revenues? Promising products? Brilliant but unproven business ideas? Nope, that was last year, the old millennium, metaphorically.
None of the half-dozen local money managers quoted here could be considered active traders. They believe in "buy and hold," but they don't believe you should never sell.
Like sophisticated small investors, they stress the importance of staying in the stock market for the long haul. But staying in the market doesn't mean staying in the same stocks. There are times -- and this seems to be one of them -- when investors have to look at their poorly performing stocks and kiss those babies goodbye.
Jerry Knight's e-mail address is knightj@washpost.com
© 2001 The Washington Post Company |
