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With the Nasdaq down 47% off its highs (and the internet sector off an even more dismal 74%), I feel it's time to pause and reflect on the big picture. Why has the Nasdaq been hit so hard this year?
When you check how the market is doing and see more red than green, are you happy? Probably not. But as Warren Buffett has pointed out, you should be, if you're expecting to be a net saver (in other words, buying more stock than you're selling) in the coming decade. Why? Because the drop gives you an opportunity to buy additional shares more cheaply. From the master himself: "Many investors who expect to be ongoing buyers of investments throughout their lifetimes illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases." Of course, if you got on board when the Nasdaq hit 5000 and are wondering whether you made a mistake, this fact might not comfort you very much, but if you're a sufficiently long-term investor, it should. Another quote from Buffett: "The most common cause of low prices is pessimism: sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." Undoubtedly pessimism rules in the tech sector (and especially with internet stocks), and some pessimism is certainly justified, for the reasons listed in the first paragraph. But this pessimism might signal a buying opportunity. However, we must first determine whether the long-term story is intact. In 1994, Bill Gates was the only person in the top ten of the Forbes' 400 Richest list who made his money from technology. In 2000, eight of the ten made their money from technology, either by starting their own companies or by investing in tech stocks. The two exceptions are Warren Buffett (who had a sizeable head start on most of the others) and Sumner Redstone, Chairman and CEO of Viacom (which could be considered semi-tech). I don't know whether either of these guys will be knocked off the list, but I would be very surprised if any other non-technologists get added to the top ten list... ever. Also, I expect at least 350 of the Forbes 400 of 2010 to have made their money in technology. As historians have noted, technological progress proceeds exponentially: more breakthroughs now happen each decade than in all of previous human history. As Intel's Andy Grove would say, we are at the critical inflection point, when mankind's ability to utilize technology to create value is starting to skyrocket. This is a freight train that cannot be stopped... the wisest course of action is to get on board by investing in the companies poised to capitalize on the ascent. I'm not saying that tech stocks have nowhere to go but up from here. I'm not a market timer, so I don't know which direction tech stocks are headed in the coming weeks and months. But I can safely say that tech stocks are a lot cheaper than they were nine months ago, so if you are a long term investor looking for an attractive entry point, this could be it. Of course, that doesn't mean that all tech stocks are now bargains. Some deserved to be driven down, and even at these levels some are overpriced... for example, those startups that have highly unprofitable business models and are quickly burning through their cash might not survive and probably shouldn't be bought at any price. But there do seem to be bargains to be had in tech. I have my favorites, but I make it a policy not to issue recommendations. If you are looking for someone to pick stocks for you, Tomments #2 can point you in the right direction. If you are sufficiently experienced to be able to spot a bargain, this is a great time to look: there are actually internet companies that are debt free and have cash and short-term investments in excess of their market cap; this is (almost) like getting the company for free. If you're risk-averse, it's generally safer to stick with the large-cap leaders, because the small caps tend to get hurt more in a downturn. If you don't like the idea that the couple stocks you pick might all go belly-up, then consider an index or sector fund. And obviously, the usual warnings apply: don't invest money that you'll soon need; don't put too much of your portfolio into a single sector or into high-risk investments; etc. But if you believe as I do that technology will continue to blanket the planet and provide tremendous wealth creation opportunities for those who are paying attention, the recent selloff might prove to be a good time to start or add to your position. Forgive me if most of what I've written here is common sense. It's certainly no revelation that the internet in 2010 will play a much larger role in our everyday lives than it does in 2000. But those who were buying when the Nasdaq was at 5000 and are selling now that it's below 3000 seem to have temporarily forgotten the obvious. If your head is telling you to buy but your stomach is telling you to sell, listen to your head. The dips may feel painful as you experience them, but those jagged up-and-down moves soften into a steady exponential upward curve when viewed from sufficiently high in the sky. If you look at a logarithmic chart of the Nasdaq Composite from its inception to date, you might be surprised how small the recent plummet looks. One final suggestion: take a break from CNBC for a few days and instead spend the time reading a big-picture book. Not a book about investing, but a book about how technology will change the world in the coming decades. Three recent favorites that I highly recommend are Robert Wright's Nonzero, Matt Ridley's Genome, and William Schaaf's A History of Invention. These books weren't written with investing in mind, but when the market dips and I temporarily second-guess whether technology's long-term impact will really be as profound as I think, books like these restore my faith. back to top page 1 of 1 Nonzero: http://www.amazon.com/exec/obidos/ASIN/0679442529/ Genome: http://www.amazon.com/exec/obidos/ASIN/0060194979/ Invention: http://www.amazon.com/exec/obidos/ASIN/0816040729/ Send feedback |
copyright 2002 Thomas Murcko. All Rights Reserved.