One of the main things holding people back from being smart investors in emerging tech stocks today is their searing memory of being crushed in the 2000 and 2008 bear markets. People feel that they may have been fooled once, and they may have been fooled twice, but they sure as heck won’t be fooled again.
And to a certain extent, who can blame them? Not me. It’s a horrible feeling to see the hard-earned money you have put into the shares of a technology company go up in smoke. And even worse when you see that the company’s executives and equity underwriters made out just fine, as they managed to cash out early and left public shareholders holding the bag.
Yet the reality is that the equity markets are still the best place for most people to invest and grow their money for retirement, their kids’ college education, or a home. You can’t just let the money you make as a doctor, salesman, teacher, attorney or civil servant pile up in the bank earning virtually no interest. And government bonds, safe as they are, also pay very little interest.
In late 2008 and early 2009, when people were just throwing the shares of valuable stocks on the ground, you could buy GE for $5 a share.
This may make you feel smug and safer, but the reality is that with inflation you are losing ground. And the bank is laughing at you, because even as it pays you half a percent on your passbook savings account, it turns around and lends that money out at 6 percent to 10 percent.
The reality is that alternatives are not just scarce, they’re almost non-existent. Residential real estate proved to be a terrible option in the 2007-2009 financial crisis, and there are still way too many apartments and duplexes in most U.S. cities today, driving down the value of owning a building.
That leaves the stock market as one of the few places to help your fortune grow, and that’s not a bad thing at all. Wall Street is not only not rigged against you, but with a little training and encouragement, you can learn how to lean against the majority at key moments to beat those guys at their own game.
You see it’s not just about betting on the right technologies and management teams, it’s doing so at the right time. And it’s also about increasing your bet size when scary events lead most investors to lose their heads and sell willy-nilly, making even the best stocks super-cheap, and putting the odds of winning the most heavily in your favor.
Trust me on this, I have seen it all since I started to invest in tech stocks not long after leaving graduate school in the early 1980s, right into the teeth of the Reagan recession. Unemployment was much worse than it is now, around 11 percent, companies were shutting down all over, inflation was running toward 15 percent, it was a mess.
And yet looking back, holy cow: What an opportunity that was at the tail end of a bear market. No one wanted to own stocks back then, but in reality we can see that there were bargains absolutely everywhere you looked.
— The great drug company Merck (MRK) was going for a split-adjusted 60 cents in the early 1980s. Twenty years later it was cresting $60, a 100x gain.
— General Electric (GE) was going for a split-adjusted 40 cents back then; twenty years later it was $42, more than a 100x gain.
— In 1986, you could buy Microsoft (MSFT) for a split-adjusted 7 cents. Twenty years later, it was $44, a 625x difference.
— In 1988, you could buy EMC (EMC) not long after its IPO for a split-adjusted 9 cents. Just 12 years later, it hit $103, an 1,145x difference.
To be sure, I am cherry-picking the very best companies that were the big winners, and there were many that looked almost as good as these but disappeared under the sands of time due to poor managements, poor strategies, overmatched products or just plain bad luck. But the truth is that picking just a few amazing winners, and having the guts and foresight to hang onto them through thick and thin, can compensate for a whole lot of lesser choices.
And it is really not that hard to spot those winners early in their lifespans because the success that becomes obvious to everyone when the companies mature is almost always equally evident when they are a lot younger. A great example right now is Workday (WDAY), which I recommended to readers a month after its IPO in December 2012.
It had everything going for it that I look for in an emerging growth stock: A unique set of products at the leading edge of a technology revolution, a quickly growing customer list, proven management, and incredible skepticism about its prospects from analysts. At every step along the way, analysts bad-mouthed Workday’s opportunity and mocked its valuation. Yet I recommended it over and over because you just do not see such companies come along very often, and especially not ones run by men who had done it all before, in this case as founders of PeopleSoft, which was one of the great stocks of the 1990s until it was bought by Oracle.
My persistence on this one has paid off, because now all of sudden Workday is being upgraded and celebrated — after the fact for most, of course — after it reported Wednesday that it beat expectations on revenues and earnings in the last quarter, and raised guidance.
I’m telling you this story because all of the skepticism about tech stocks that has built up for investors since the crashes of 2000 and 2008 has had the effect of making even the best companies in the industry kind of ridiculously cheap. And cheapness is its own reward. Cheapness is one of the best forms of risk control. If you can buy smartly and with conviction when everyone else is mournful, and worried, and still kicking themselves over mistakes of the past, then you can make out very well at any point in the cycle. It just happens to be truer today than ever because most of your competitors out there — other potential investors — still cannot bring themselves to the task.
I’ve learned that every bull and bear cycle has the same emotional fingerprint. People are always skeptical, afraid, pessimistic and aloof at the beginning of the cycle when stocks are cheap and should be bought, and they are always buoyant, excited and overly optimistic near the end of the cycle, when stocks are expensive and should be sold. You can track these cycles using all kinds of metrics, not just through anecdotes or hunches.
Without doubt the best time to invest in our generation was in late 2008 and early 2009, when people were just throwing the shares of valuable stocks on the ground, and you could buy General Electric for $5 a share. I had warned readers to get out of stocks in September 2007, two years before, and yet by the end of 2008 and start of 2009, I was pounding the table urging people to buy at what appeared to be prices that they would never see again.
Yet the strange thing is that I still largely feel that way today. No, of course stocks overall are not nearly as cheap as they were in 2009. But neither are most people so excited about stocks that they are throwing money at them willy-nilly, as they did in the late 1990s just as crazily as investors did in 1907 amid the steel consolidation craze, or in the late 1990s amid the dawn of the Internet era.
Partly due to the lingering effect of the pain suffered in 2001-2002 and 2007-2009, there remains a smoldering pessimism among investors that has resulted in an enduring cheapness to many technology stocks. And cheapness in the face of strong prospects, as I said, is its own reward.
And that cheapness is something that you can exploit today if you are willing to dream big again.