Lessons Learned From the Tech Bubble That Burst

We all want to think of ourselves as rational.  At least most of us do. 

And yet we all do stupid things. 

Wait!  Don’t take offense.  I meant to say that I do stupid things … and I seem to have lots of company. 

Specifically, I’m thinking of how I (and most of my colleagues) at a big Boston investment house reacted when the Tech Bubble finally imploded in 2000. 

Like most other investors in America, my friends and I had been stuffing our 401(k) money (and every other dollar we could lay our hands on) into the hottest of the hot tech funds available.  Our company had obligingly been opening lots of new funds to target increasingly specific opportunities in the tech world, so we had lots of high flyers to choose from.

Then came the month of reckoning.  (Those of you who lived through it don’t have to read the rest of this paragraph if it will be too painful.)  The Nasdaq Composite, which had been poking its head above 5,000 in March 2000, fell as low as 3,266 in April, then rallied back above 4,000 to form a really nice double top in July and August.  Then the real fun began.

By the end of 2000, the Index had fallen to about 2,500.  By the end of the following year, it had dropped to 2,000.  And by the end of September 2002, like a dead dog in a dumpster, the once-proud Nasdaq had plunged to 1,100.  Needless to say, the effect on our retirement funds was equally dire.

At this point, you may be incredulous.  You may be wondering why a group of (apparently) intelligent people would hold on to a bunch of perishing mutual funds as they were cut off at the ankles, then the knees and finally the hips?

Honest Answers for Irrational Decisions

I have a few answers.  They’re not good answers, but they’re honest, which is the only good quality for this kind of post-mortem.

First, my friends and I refused to get out of our hot tech funds because they had made us so much money on the way up … at least on paper.  The emotional charge that comes from watching an account balance grow (really fast!) doesn’t just go away.  You don’t want to give up on those investments.  (And if you don’t think that this happened, just ask anyone you know who was into growth investing at the time.  If you can’t find at least one person who held onto a tech stock all the way over the falls, you’re associating with a bunch of liars.)

Second, the market kept dropping coy hints that it had bottomed.  If you look at a chart of the Nasdaq from 2000 through 2002, you will notice a number of rallies.  These rallies eventually gave way to more horrifying declines, but I can assure you that at the time, each and every one was taken as evidence that things were turning around.  Anyone who thought of bailing out would have worried that they would feel like a fool if they jumped just as the market started to heal.

Third, we had all been trained to regard reacting to short-term market moves as risky to the point of foolishness.  We were working for a mutual fund company, after all, and what such a company wants above all is for you to leave your money where it is.  Redemptions reduce assets under management (the main source of continuing income for the company) and re-allocations create problems for fund managers.  Accordingly, we all parroted the mutual-fund industry mantra: “It’s Time, Not Timing!”  And we left our money where it was to let time do its work.

It’s sad, really.  Some people who had been planning to retire soon had to postpone their plans.  Others just got more and more depressed as their retirement money shrank.  If only we’d known then what we know now. 

A few years later, I joined the Cabot team, and since then I’ve been impressed when Cabot’s newsletters are able to beat the S&P 500 and the Nasdaq over time.  And when I think of what a difference Cabot’s market timing indicators and sell disciplines could have made to all of us then …

We get too soon old and too late smart as the little gift store placard tells us.

Just by the way, there was one person with whom I worked in 2000 who came out of the Time of the Bursting Bubble in good shape.  He actually listened to the warnings the market commentators were issuing about the markets and shifted his entire allocation to a Stable Value Fund in January 2000.  He had been trained as a banker, and he never fully bought into the chart narcosis that turned the rest of us into such idiots.  I’ve never forgiven him.

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The Museum Game

My wife and I sometimes go to a museum with another couple that shares the taste for lovely objects.  For as long as we’ve known them, these friends have played a version of what they call “The Museum Game.”

All you do to play is stop at the end of every room you visit and decide which one piece on exhibit you’d like to take home with you.  Then, at the end of your visit, you make the same selection from every room you’ve been to. 

It’s pretty harmless fun, but the interesting part of it is that making those decisions actually teaches you a lot about what you really like in art.  Some things you admire, but wouldn’t want in your house.  Others speak to you in ways that you only dimly understand. 

Maybe everyone else in the world already does this, but I don’t think so. 

My wife and I now play The Museum Game whenever we go to an exhibition or visit a gallery.  We try not to be too loud about it, since museum security people can look askance at people who are talking about taking home the exhibits.  But I like it.

I could make a cheap point here about investing, but I think I’ll skip it.  Just try it the next time you go to a museum; it may change the way you look at art.

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Chinese IT Outsourcing Enterprise

If a stock has everything, chances are that everyone has it.  It would be great to uncover an undiscovered stock with a strong chart, excellent fundamentals and unlimited prospects.  Unfortunately, the only way to get that package is to find a stock that is so new, so thinly traded or so cheap that most investors won’t give it a look. 

Well, you may be in luck, because my investing idea in this issue is a stock that hits the downside trifecta: it’s new, thinly traded and cheap.

Here’s the story.  The company is called VanceInfo (formerly WorkSoft) and the symbol is VIT.  The company is an 11-year-old Chinese IT outsourcing enterprise that serves companies in high tech, financial services, manufacturing, telecom and retail.  With clients such as IBM, HP, Oracle, GE, Sony, Panasonic and lots of others, it’s clear that some big players are taking the company seriously.

What drew me to the stock was, first, its numbers.  With triple-digit revenue growth in six of its last seven quarters (and 96% in the other), and triple-digit earnings growth in the latest three, VanceInfo is on a very hot track.  This isn’t a flash in the pan, either, as revenue growth for the latest three years has been 90%, 88% and 116%.

Second, I like that 85% of the company’s 2006 revenues came from U.S. companies.  This isn’t patriotism on my part; rather it’s an indication of how much potential growth the company can experience in China as more industries there begin to need IT outsourcing. 

The chart for VIT (NYSE) shows a stock that came public in December 2007 at 9, and then got nearly cut in half by the Winter Bear market, falling to below 5 before rebounding.  Now back at 9 after a bumpy rise on pretty thin volume (112,000 shares a day, on average), the stock is ready to take aim again at a double-figure price that will make it more attractive to big institutional investors.

Low volume, low price and a recent IPO are all risk-heightening factors, but every once in a while, this kind of bet can pay off. 

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Paul Goodwin
For Cabot Wealth Advisory


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