Being Street Smart February 25/05

by Sy Harding
February 25/05

SEARCHING FOR 'THE NEXT BIG THING'!

Every investor dreams of getting in on the ground floor of ‘the next big thing’, the next new technology. After all, those investors who got into Microsoft early, after the introduction of personal computers, and just held onto the stock, were made multi-millionaires by that confidence.

Unfortunately, the odds are significantly against finding another Microsoft. Choosing a stock (out of the more than 17,000 that are out there) that will hold up for even two or three years is difficult enough, let alone hitting one that will hold up for a couple of decades.

However the search continues. The ‘next big thing’ is almost sure to be nanotechnology, and already investors are losing sleep on how they can get in on the ground floor. As you probably know, nanotechnology carries the promise of being able to produce structures with each individual atom precisely placed, a technology that will dramatically change how virtually all products are made. We’re familiar with meters, centimeters, even millimeters. A nanometer measures one billionth of a meter. If you prefer decimals, it’s .000000001 of a meter.

The technology, taking place in the invisible subatomic world, will eventually produce incredible advances in the quality and usefulness of almost all products, from medicine and medical equipment, to music, clothing, telecommunications, and computers.

It is several years from being put to use. Much more research and development will have to take place. But just the word nanotechnology is beginning to create the same excitement among investors that the phrase dotcom produced in 1999. And the search has begun for any company that can be even remotely perceived as related to nanotechnology. It won’t be long before venture capitalists and entrepreneurs discover that all they need do is incorporate the letters ‘n-a-n-o’ in their name and they’ll have the key to selling investors any number of ‘story’ stocks.

Investors will need to remember how it goes with start-ups and new technologies. They make great trading vehicles, but lousy buy and hold stocks.

It’s a lesson the market has been trying to teach for a couple of hundred years. Most of the early entrants in a new technology do not survive, and it’s virtually impossible to predict which few will.

The examples are too many to recount. But it’s not a new phenomenon. For instance, in the early 1900s, in the excitement after the development of the internal combustion engine, more than 4,000 companies were launched to produce automobiles. All of them apparently had enough going for them to attract investors who thought they were in on the ground floor of the next big thing. They were, but obviously most of the companies did not make it, and investors in 98% of them lost their shirts.

It has been a similar situation with any new technology, from radios and televisions to biotechnology and computers. Each were indeed significant new technologies that would continue to grow for decades. Hundreds of start-up companies were launched that provided the promise of getting investors in on the ground floor. But each time, the vast majority, always including some of the most promising, did not make it. Their prospects and their stocks soared like Roman candles, and then, also like Roman candles, they sputtered and fell to the ground.

The most recent examples were the Internet and high-tech companies of the late 1990s. The Internet, fiber-optics, telecom, etc., were indeed important new technologies destined to last for many decades. There were 637 companies related to them that were brought public in initial public offerings in the 1999-2000 IPO craze. All shot up quickly and excitedly. All then fizzled out even more quickly and fell to earth. More than 500 start-up Internet companies alone, including the most popular and promising, like Priceline.com, E-toys, and Dr.Koop.com, totally disappeared into bankruptcy. The relatively few that survived saw their stock prices plunge dramatically back to earth. High-tech companies in such ‘next new things’ as fiber-optics, biotech, and telecom technologies all followed similar trajectories.

It’s important to remember that they were all great intermediate-term holdings, but terrible buy and hold stocks. Those who buy investments with the intention of holding them regardless of how conditions change wind up papering their walls with the waterlogged stock of a Wang Laboratory, Polaroid, JDS Uniphase, or some Dotcom nightmare.

Buy and hold investing never did work well. In the modern world of smarter investors it doesn’t work at all.

It is important to be aware of the market’s seasonality, of the tendency for stock prices to cycle between under-valuation and over-valuation, and the history of the market suffering a bear market on average of every 3.4 years.

I remind you of this now since the market’s current favorable season is entering its fifth month, and the current bull market has been running for more than three years. I believe the near-term economic numbers remain positive enough to support the stock market for awhile longer, in spite of rising interest rates and other concerns. However, I also expect that once the market’s favorable season ends, perhaps even before, the market will run into significant trouble in 2005, and profits will be made from the downside..

Sy Harding

Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.