Will they, and you, ever relive that peak experience of a year ago? No. You’ve loved and lost. Even the Net stocks that thrive won’t warm to their old highs any time soon. Large numbers of the dot-coms will fail, taking what’s left of your money with them. The rest will be bought by real companies–no bonanza, but at least reprieve.
The question, I guess, is what you’ve learned from the affair. Are you poorer but wiser? Or will you go haring after the next hot items touted on CNBC?
Some of those hotties are already flouncing into sight. Internet software and hardware, to help companies link their business, inventory and manufacturing systems. Wireless devices for “mobile commerce”–in case you want to shop from your car while driving your kids to soccer practice. Tools for creating e-selling sites in stores and malls. Service providers, for managing corporate Web traffic. Anything broadband (especially anything “optical,” which is broadband on adrenaline). Faster ways of getting onto the Internet.
Making pesto: But trying to pick the next winning tech stocks “is like standing in front of a nursery window and trying to pick the next Bill Gates,” says economist Maureen Allyn of Scudder Kemper Investments in New York. A few of the stocks will soar (but you’ll have to get out “in time”). Many others will simply grind your dollars into pesto. If your interest is truly money rather than bragging or sport, you need to know the rules of the road:
The 5 percent rule. The world of venture investing belongs to institutions and the rich. The average investor who steps to the table is risking his or her savings on what amounts to roulette. If you strike it rich, you’ll probably “reinvest” your profits in another turn of the wheel. Eventually, most gamblers lose.
If you can’t resist playing, throw no more than 5 percent of your money at the gods. If your stocks rise, take enough of the gain so you’re still leaving only 5 percent loose. Don’t buy on margin.
The diversification rule. You haven’t diversified if you switch to an Internet mutual fund. That’s just another kind of wheel. The Jacob Internet Fund dropped 82 percent from its peak to its low this year. Kinetics Internet Fund dropped 59 percent; the e-Commerce Fund, 67 percent, and the Monument Internet Fund, 65 percent. Any money invested here should be part of the 5 percent you’ve reserved for financial wanderlust. (Monument changed its name last month to the Digital Technology Fund, for those of you wise to which way the wind blows.)
Still, there’s plenty of high-concept stock-picking left. Kevin Landis, who runs the volatile Firsthand Funds, speaks of paying a “reasonable multiple times earnings, projected out”–but says “nobody knows” when earnings on his stocks will come. “We’re looking at how the world’s going to be different and who will make the change,” he says. No problem. See “the 5 percent rule.”
Kathleen Shelton Smith, of the IPO Plus Fund, offers this new-era rule of thumb: a company growing by “only” 20 percent a year needs earnings to be a good investment. A no-earnings company (usually, one with no current competition) has to be growing by a projected 40 percent.
The drain-the-pond rule. In bull markets, which raise all boats, no one cares what awfulness lies in the murk below. So far, the Dow and the S&P averages still look like resting bulls.
The Nasdaq pond is something else–down 47 percent from its March peak. The Amex Internet Index of 51 stocks is off by 51 percent. As the water level drops, garbage is heaving into view–stinky accounting, rusted ethics, deep stock-price manipulation. In bear markets, all the surprises are usually bad ones.
Here’s a lesson in lower math. When a stock drops from $250 to $30, you lose 88 percent of your money. To get back to $250, your stock now has to gain 733 percent. And that’s just to break even. How many of your knocked-down loves do you think have such fire in their heels? You dared to buy Net stocks at prices impossibly high. Funny how hard it is to notice when a bubble bursts.
