Back when we were all a bit more naive, when we thought the last mile mattered and that if Kozmo.com had a problem it was with its "business model" rather than its business, a lottery approach to investing in hot technology stocks became common. Not all of my stocks will be the next

Microsoft

, the argument went, but at least one of them probably will be. And that means my richly valued portfolio is in truth a bargain.

A mistake we'll never make again, right? To the contrary, some investors appear to be making it all over again. Except now they're not taking out lottery tickets on outfits they think will be the next tech juggernauts -- they're plunking their bucks on the companies they think will survive.

Tech stocks have rallied hard over the last two months, the smallest, most competitively challenged ones often rallying hardest.

Corvis

(CORV) - Get Report

, for example, a networker whose chances of making it are deemed slim

by some observers, has jumped 155% from its Sept. 27 low. An outfit in the same business by the name of

Cisco

(CSCO) - Get Report

is up a scant 76% over that period, by contrast.

Seems silly, unless you're taking a flier on the chance that Corvis will make it to the other side of the recession, or get taken out by a larger competitor. That's fine, of course, except that all the networkers who are likely to be run out of business by the Ciscos of the world -- companies such as

Sycamore

(SCMR)

,

Redback

(RBAK)

and

Foundry

(FDRY)

, for instance -- have rallied sharply, too. Same's true of the overcrowded storage space. Every ticket's a winner, folks.

Big Bounces From Post-Sept. 11 Lows
Techs, anyone?

Source: Baseline

Of course, we've been down this road before. You'll recall that the excitement over projected cash flow positivity -- read, continued survival -- at many Internet companies failed to keep those names from the ranks of the penny stocks. And similarly, any rally in these speculative tech names is unlikely to hold, going by what most observers think about industry spending trends and the like.

The Lottery of Babylon

That's just another way of saying investors may be seriously underestimating the shakeout that's coming in tech. Data from the

Federal Reserve

reveal profound excess. From July of last year to this October, the capacity utilization rate for computer, communications equipment and semiconductor manufacturers has fallen from 90% to 61%. It makes for one of the most sickening charts in recent economic history.

Ugly
Tech's capacity use rate plunges

Source: Federal Reserve

"I've never seen anything like it," says Morgan Stanley chief U.S. economist Richard Berner. "All those people that think we're going to get a quick turnaround in this stuff -- all I can say is I respectfully disagree."

Maybe the only thing that comes close to the tech glut is the glut in the energy complex in the early 1980s. Then, as now, a highflying sector got crushed by excess. One moment demand could hardly be met, the next there were too many drillers, wells and refineries for anyone to make money.

Past Is Prologue
Energy industry capacity use over 30 years

Source: Federal Reserve

"It was very similar to what's happening in tech," says Ram Partners President Jeff Matthews (then an oil analyst, now a hedge fund manager who spends a lot of time looking at tech). "All the companies that were asset rich and management poor got bought because, as the saying went, it was easier to drill for oil on Wall Street than risk exploration dollars. The highfliers that had high cost structures, that were drilling in places where it didn't make any sense, went out of business."

Richard Cory

The key difference between what went on in energy and what will go on in tech is that while oil is always oil, technology is constantly evolving. That's good news for the sector: Today's overcapacity will eventually become obsolete and, as a result, won't be the same kind of drag it was for energy.

But that may also be bad news for a lot of struggling techs and for investors who are hoping that the companies they own will, if not succeed, at least become solid takeover candidates. "In technology, your assets have much shorter lives than if you're an oil company, so it's a little harder to speculate," says Matthews. "You have to be sure a company is going to get taken over before the technology is obsolete. There's a real thin line between cheap and terminal."

That's not the kind of environment where the recent run in second- and third-tier tech stocks makes a lot of sense. Because investors are basically betting on these companies' ability to survive, says Banc of America Securities equity portfolio strategist Tom McManus, their stocks have basically become options on their futures.

"If you acquire an option to participate in every possible outcome," he says, "you will participate in the payoff. The question is, what is the size of the payoff relative to your investment? Investing success is not just showing the company you own is still standing."