(Feb 11, 2015)
Every investor can draw lessons from the tech debacle and its aftermath:
1. No specific stock or sector is destined to rise forever. What goes up and then down does not always go back up again. Even regaining 5048 will still mean real losses for the Nasdaq Composite. Although inflation has been relatively mild over the past 15 years, it has eroded the value of the dollar by about 30%, and Nasdaq’s tiny dividend yield (currently 1.3% and a microscopic 0.1% in 2000) doesn’t make up for the decline in buying power.
But forget inflation. Most of Nasdaq’s darlings at the top of the bubble haven’t come close to regaining their value. In 2000, the peak market cap of Microsoft ( MSFT ), then the world’s most valuable company, was $642 billion; today, it’s $389 billion. Cisco has fallen from $557 billion to $142 billion. Nortel Networks, a Canadian firm with a peak market cap of $283 billion, is in bankruptcy, and Lucent Technologies, once worth $285 billion, is now a part of Alcatel-Lucent ( ALU ), a French company with a cap of just $10 billion. (Market caps are as of January 9.)
2. It is nearly impossible for an investor to avoid being caught up in a stock frenzy of some sort. There’s always a reason--even beyond the greater-fool theory--to justify a high share price. In the case of the tech bubble of the late 1990s, it was that the Internet would revolutionize ... well, everything. The truth is that it almost has. But its most important economic characteristic--tearing down barriers to entry in practically every business--has brought both fantastic innovation and the kind of vicious competition that is unkind to a stock’s price.
3. The best insurance against stock market disaster is diversification. Even if your investment horizon is decades long, it won’t help if you hold only a handful of stocks or sectors. Where many investors went wrong during the tech boom was in not rebalancing their portfolios. Imagine that in 1990, you owned a portfolio split evenly between the Nasdaq Composite and the Dow Jones industrial average. In a decade, your Nasdaq holdings rose by a factor of 12; the Dow roughly quadrupled. So as 2000 began, your portfolio was roughly 75% in Nasdaq stocks and 25% in Dow stocks. Such a lopsided portfolio simply begs for trouble.