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Re: Interesting article, I thought
Yes, very good article. It illustrates what I believe may be a flaw
in the NAIC investing philosophy.
NAIC pretty much focuses on long term, well behaved growth stocks.
Another valid (and good) approach is the 'contrarian' style of
investing -buying stocks when they're out of favor - like Grahm,
Buffett, et al. Stocks like these typically have a bad quarter or so,
or are just not the stock du jour (like today's dot-coms).
SRV, RHI, maybe THC, and one of my holdings, the infamous dog of
1999: Rite Aid (RAD), are all probably contrarian considerations now.
The trick, of course, is to determine which will turn around.
I think we're not too vulnerable by the measures of this article: we
hold a fair amount of "old economy" stocks (maybe we need more). Our
tech stocks all have earnings, and fairly dominant positions in their
industries. They might be a bit pricy now, but they're more than just
VC dollars and hype.
--- "Montague, Nancy" <Nancy.Montague@nreca.org> wrote:
> January 2, 2000
> Humbling Lessons From Parties Past
> Issue in Depth
> By BURTON G. MALKIEL
> BENJAMIN GRAHAM, co-author of "Security Analysis," the 1934
> bible of value investing, long ago put his finger on the most
> words in an investor's vocabulary: "This time is different."
> Pricing in the stock market today suggests that things
> really are different. Growth stocks, especially those associated
> with the
> information revolution, have soared to dizzying heights while the
> stocks of
> companies associated with the older economy have tended to
> languish. Well
> over half the stocks on the New York Stock Exchange and Nasdaq are
> at lower prices today than they did on Jan. 1, 1999.
> It is not unusual today for new Internet issues to begin
> trading at substantial multiples of their offering prices. And
> after the
> initial public offerings, day traders rapidly exchange Internet
> shares as if
> they were Pokémon cards for adults.
> As we enter the new millennium, how can we account for the
> unusual structure of stock prices? Does history provide any clues
> sensible strategies for today's investors?
> To be sure, we are living through an information revolution
> that is at least as important as the Industrial Revolution of the
> late 19th
> century. And much of the current performance in the stock market
> can be
> traced to the optimism associated with "new economy" companies --
> those that
> stand to benefit most from the Internet. The information revolution
> profoundly change the way we learn, shop and communicate. But the
> rules of
> valuation have not changed. Stocks are only worth the present value
> of the
> cash flows they are able to generate for the benefit of their
> It is well to remember that investments in transforming
> technologies have not always rewarded investors. Electric power
> railroads, airlines and television and radio manufacturers
> transformed our
> country, but most of the early investors lost their shirts.
> Similarly, many
> early automakers ended up as road kill, even if the future of that
> was brilliant.
> Warren E. Buffett, chief executive of Berkshire Hathaway and
> a disciple of Graham, has sensibly pointed out that the key to
> investing is
> not how much an industry will change society, but rather the nature
> of a
> company's competitive advantage, "and above all the durability of
> Yet the Internet must rely for its success on razor-thin
> margins, and it will continue to be characterized by ease of entry.
> A drug
> company can develop a new medication and be given a 17-year patent
> that can
> be exploited to produce above-average profits. No such sustainable
> will adhere to the dot-com universe of companies.
> Moreover, the "old economy" companies may not be nearly as
> geriatric as is commonly supposed. We still need trucks to
> transport the
> goods of e-commerce, as well as steel to build the trucks, gasoline
> to make
> them run and warehouses to store the goods.
> Precedents of recent decades offer many valuable lessons to
> today's investors. Consider the "tronics boom" of 1960-61, a
> so-called new
> era in which the stocks of electronics companies making products
> transistors and optical scanners soared. It was called the tronics
> because stock offerings often included some garbled version of the
> "electronics" in their titles, just as "'dot-com" adorns the names
> today's favorites. More new issues were offered than at any
> previous time in
> history. But the tronics boom came down to earth in 1962, and many
> of the
> stocks quickly lost 90 percent of their value.
> Another parallel to today's market was seen in the 1970's,
> when just 50 large-capitalization growth stocks, known as the Nifty
> 50, drew
> almost all the attention of individual and institutional investors.
> were called "one decision" stocks because the only decision
> necessary was
> whether to buy; like family heirlooms, they were never to be sold.
> In the
> early part of that decade, price-to-earnings multiples of Nifty 50
> like I.B.M., Polaroid and Hewlett-Packard rose to 65 or more while
> overall market's multiple was 17. The Nifty 50 craze ended like all
> investors eventually made a second decision -- to sell -- and some
> growth stocks fell from favor for the next 20 years.
> The biotechnology boom of the early 1980's was an almost
> perfect replica of the microelectronics boom of the 1960's. Hungry
> gobbled up new issues to get into the industry on the ground floor.
> ratios gave way to price-to-sales ratios, then to ratios of
> potential sales
> for products that were only a glint in some scientist's eye. Stock
> surged. Again, as sanity returned to the market and more realistic
> of potential profits were made, many biotechnology companies lost
> almost all
> of their value by the early 1990's.
> The lessons here are clear. Occasionally, groups of stocks
> associated with new technologies get caught in a speculative
> bubble, and it
> appears that the sky is the limit. But in each case, the laws of
> gravity prevail and market prices eventually correct. The same is
> likely to
> be true of the dazzling stocks in today's market.
> Few of the Internet darlings will ever justify their current
> valuations, and many investors will find their expectations
> Even supposedly conservative index-fund investors may be surprised
> to know
> that very significant shares of their portfolios are invested in
> technology companies whose P/E and price-to-sales ratios vastly
> exceed even
> the sky-high multiples reached during those past periods of market
> At the very least, investors might well start the year by
> examining their portfolios, to see if their asset allocations are
> appropriate for their stage in life and their tolerance for risk.
> Burton G. Malkiel is an economics professor at Princeton
> University and the author of "A Random Walk Down Wall Street" (W.W.
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