Besides writing this blog, I usually write an article for Saturday's Globe and Mail - an investing sidebar, called Berman's View, that accompanies the weekend cover story. Here is this week's column accompanying Lessons from the tech bust:
At its peak during the dot-com bubble, the Nasdaq embodied some pretty nutty ideas. It was one thing to sell pet food over the Internet, as Pets.com did. It was another thing to value the pet food company at more than $100-million (U.S.) soon after its initial public offering.
No wonder the Nasdaq composite index languishes at less than half its peak level 10 years ago. Still, it's one thing to poke fun at the irrational exuberance of yesteryear and another entirely to write off technology stocks as a dangerous experiment not to be reconsidered.
Indeed, by some measures, technology stocks are as big as ever. To get a sense of this elevated status, turn your attention to the broader S&P 500, the benchmark U.S. stock market index. Among the top 20 names within the index, based on their market capitalizations, technology stocks dominate. Here, you'll find seven technology heavyweights: Microsoft, Apple, Google, INM, Cisco, Oracle and HP.
Combined, these companies have market capitalizations of $1.2-trillion, representing 12 per cent of the index's market cap.
That's a big slice, and it is more than just a gee-whiz statistic. While some of these companies suffered from excessive valuations during the worst of the dot-com bubble days, they stood out from many of their peers because of their solid business plans, strong management teams, rising revenues and consistent profits.
Still, here's the twist: Even if you had avoided investing in the Nasdaq composite index at its peak, knowing full well that companies like Pets.com were doomed to failure, and instead opted to invest in these seven technology titans, you probably wouldn't be a happy investor right now.
As a weighting within the S&P 500, technology stocks have shrivelled from 34.8 per cent in March, 2000, to about 19 per cent today.
The tech titans haven't been immune. Google wasn't a publicly traded company then, and Apple is a notable - though hard to predict - exception, rising 76 per cent since 2000. But despite Microsoft's current status as the second-largest stock in the S&P 500 (behind Exxon), long-term shareholders are all too aware that the share price is 50 per cent below its level in March, 2000. HP is down 53 per cent since then, Oracle is off 70 per cent and IBM is down 22 per cent.
These returns are from the peak of the dot-com bubble, of course. But they show just how hard it is to separate good stocks from the bad when the market has turned nutty.