It's time for some deprogramming.
Not that long ago, individual investors intoxicated by the bull market in tech stocks cast aside the long-cherished market methods and maxims for a new religion of momentum, triple-digit annual returns and Internet mania. Valuations were for chumps, dividends for grandma. Forget that stuff, this is the New Economy, baby.
Does anybody feel that way now?
"It was insane," says Jay Shartsis, a veteran options trader at
, a small New York brokerage firm. "Things like dividends and book value were thrown out the window. But it went on so long everyone had to participate."
Beginning with the carnage of early April and continuing through the
continuing autumn swoon, investors swept up by the cult of the bull market now find many of their core beliefs only apply in a market that resembles a helium balloon. Heading into today's session, the
Nasdaq Composite Index was down 24% for the year and 39% from its March 10 high (not to mention the
Dow Jones Industrial Average and the
S&P 500, off 12.7% and 9.5%, respectively, this year).
Yes, everyone can feel good about the rally today that has pushed the Nasdaq up 5% in afternoon trading. But given the performance this year coupled with the clouds looming over the market going forward -- rising oil prices, signs of slackening demand -- it's high time to re-evaluate some of the mantras of the recent market mania.
Many of today's investors were in junior high on 1987's Black Monday and weren't born in 1966, when the market embarked on a 16-year period of sideways returns. It's understandable, then, why they may lump a bear market in with the
Loch Ness monster and the
Yeti -- bad things they've heard about but never encountered and aren't quite sure really exist. Indeed, according to
magazine, investors age 18 to 23 expect an average annual return of 26.5%, compared with the historical 8% ballpark. Let's get real, starting with a long, hard look at some of the easy-money mantras.
Buy the Dips?
One of the more painful lessons has been that every fall in the market doesn't constitute a short-term dip, and it's not always prudent to try to call a stock's low point. Investors who thought
, for instance, would quickly bounce back after its early April slip from the mid-$60s to $59 were rewarded with a stock that was trading at $42 in August. If they thought that was the bottom and bought in then, they ended up with shares trading below $20 earlier this week.
Sometimes, bottom-fishing produces only muck.
is another prime example. On March 10, it was trading for $296. By April 4, it was down to $115. Almost four months later, it was at $107. On Oct. 12, it sat at $45.625. Trying to call a bottom on this erstwhile highflier would have been painful.
Of course, some declines do constitute a buying opportunity, especially when a solid, profitable company warns of isolated, short-term problems. But if a company whose stock has been priced beyond perfection and sustainable growth starts showing signs of cracking, the dip may soon turn into an avalanche.
Buy the Winners at Any Price?
Buying pricey highfliers such as
rewarded investors handsomely at different times between 1998 and 1999, despite outsize valuations that dwarfed their actual businesses.
"Is it OK to pay any price for a great company? Many of these stocks have been driven to an insane valuation. If the market ever wants to return to real valuations, it's going to take a while to unwind what's happened," Shartsis says.
He notes that the Nasdaq was, at one point earlier this year, trading at a 184
price-to-earnings ratio. "Would any investor, in their personal lives, invest in a business that was going to take 184 years to be worth their investment?"
Investors, however, seemed willing to pay for the boundless potential of technology stocks and the revolution they were driving.
"In this kind of market, buying the relative strength leader starts to be a strategy that doesn't work anymore," says Bernie Schaeffer of
Schaeffer's Investment Research
. Schaeffer says he thinks there's still too much complacency in the market. "I still see people saying, 'Forget about preannouncements, they're isolated situations. Earnings will save the day.' "
As tech stocks continue to contract, a better approach to these high-growth companies is to realize you're paying more to be in the hot spot, so take a close look at P/Es before jumping in.
Revenue Growth Over Profitability?
At the height of the dot-com boom, investors were plowing cash into
and lots of other companies on the notion that revenue growth eclipsed figuring out how to turn a profit. While Wall Street has always been a bit lenient on nascent companies with high-growth potential, it had gotten to the point where companies with sketchy business models and dim hopes for near-term profits became market darlings.
Those days are over.
"At different times, investors will pay for different things," says Rob Zidar, the co-manager of
Internet Strategies Fund
. "And right now, they aren't paying for profitless revenue growth. Investors had been buying for potential. The market has become more skeptical."
Skepticism aside, Zidar says that some of the reasons investors bought tech leaders eight months ago may not be the wrong reasons, especially where the Internet leaders such as
are concerned. Still, there has been the pain.
on Net and tech stocks isn't done being written," Zidar says. "Now companies need profit growth, cash-flow growth. You've got to be able to tell a credible story on how and when you'll be profitable and show some progress."