Technology Portfolio Update: Easy on the tar, please!
Canadian MoneySaver, January 2006.
Hard to believe it's been two years since my last column. I've missed the privilege of writing for MoneySaver readers, who are amongst the most well-informed and knowledgeable investors in the country. I hope you have been doing well in all aspects of your lives.
Let's get right down to brass tacks with an update on a market outlook and our longstanding technology portfolio.
Readers with long memories will remember my pessimistic stance of 2003. At the time I said prepare for a stock market fall of up to 50%. Two years later and the shoe has yet to drop. Instead the market in its classically endearing fashion has risen over 10%. I can see MoneySaver readers heating up a nice pot of tar to be generously applied to yours truly. Topped with a light seasoning of feathers perhaps.
But wait! Recall that my investing philosophy is not one of market timing (that is we would never sell all of our stocks just because we thought markets are going to tank) but one of risk management. Markets are risky when P/E ratios are high, when levels of consumer debt are high and when investor expectations are unrealistic. That was the case in 2003 and is even more so today. The most important thing investors should do? Figure out how much risk they can tolerate and adjust their stock market exposure accordingly.
Now to our technology portfolio: Corning is our reigning champ, returning 367% over four years. Analog Devices gained 240% over the eight years we've had it. Palm also did well, not only returning 107% in three years but also handing us freebie shares in PalmSource, which was spun off in late 2003. Our worst performer is Nortel. The puddle of trouble I was expecting turned into a swamp. But the new CEO shows promise and we'll hold on for now. We're going to sell Gateway because they've not been able to deliver the goods and the PC market is getting so competitive that even Dell is having trouble.
Sidenote: All serious investors who do their own stock-picking must sanity-check how well they're doing. If you are not a good stock picker there's no shame in that, you can use indexed funds, ETFs or mechanical value-based approaches like Dogs of the Dow/TSE and still enjoy robust returns. I have had moments where I've considered pouring tar on my own head but overall I've had enough success to keep me in the stock-picking game. One test is to mentally pick losers. That's right. Try picking out stocks that you think will underperform over a period of years. If your losers start turning into winners, that's a sure sign you need to change your investing philosophy. That's one of the ideas behind the Loser List. I'm gratified that despite an upsurging market, the two munchkin stocks that I picked have declined dramatically. Parkervision has dropped 66% and SCO has dropped 80%.
What's my market outlook? I expect a decline of up to 50% in the stock market averages within two years. This doesn't mean we should all cut and run (as is clear from my failed 2003 prediction). Instead you should look at your stock market asset allocation. If you have 50% of your assets in stocks, a 50% drop in stock prices will set you back about 25%. Is that acceptable risk? Clearly the answer is different for a single mom with a job in high-tech versus someone working in the public service who is expecting a good pension. Think about this now while markets are still strong, not after.
The levels of consumer, real-estate and government debt in the U.S. continue to grow unchecked. In California, average folks are taking out $500,000 mortgages with zero money down. Many are even taking out so-called negative amortization loans where the mortgage payments don't even cover the interest costs. This is insanity. As for their government, the Bush administration seems to think they can defy financial laws of gravity indefinitely with mind-boggling budget deficits. But whether it was the Great Crash of 1929, the Nikkei crash of 1990, or the high-tech crash of 2000, markets aren't kind to the imprudent. One likely scenario is a currency crisis that will cause the Dow and the US dollar to crash sending the price of gold above US$1000 per ounce.
Wynn Quon is chief investment analyst at Legado Associates. You can send e-mail to me at email@example.com.