As investors mourn Japan’s two lost decades, 10 March 2010 marked ten years since the investment craze in technology and telecommunications companies ended. On 10 March 2000, the barometer of dotcom mania – or what was the technology and telecom bull market of the 1990s – the Nasdaq Composite, closed at a high of 5,048.62.
That completed the Nasdaq’s stunning rise from a level of just 750 at the start of 1995, a gain of 573 per cent. Once it started to crash, it did not stop until it hit 1,114.11 in October 2002 – a drop of almost 80 per cent from its peak. Ten years to the day since its high, the Nasdaq sat at 2,359, some 53.3 per cent below its greatest moment.
The insanity of this bubble was comparable with any in history. The continuing lesson though was that investors always buy on the rumour and sell on the news, when doing the opposite is the more prudent way to make money. Ironically, the same investors who got burnt through “tech” stocks would go on to back more “real” assets such as housing and commodities, along with allegedly safe “AAA” rated securities. The obsession with higher returns without due respect for risk encouraged unacceptable levels of leverage which concluded in the GFC tragedy.
None of this meant that all tech companies turned out to be a bad investment. Google, arguably the single biggest winner from the internet, did not even go public until four years after the bubble burst. Shares in Amazon, by far the most successful internet retailer, hit an all-time high of $US 142 in December 2009, well above their dotcom period peak of $US 89.
Technology has also been one of the strongest performers of the last 12 months. It has not lost its allure ten years later. Counting out specific technology companies and sectors, such as bio-technology, on the basis of the previous bubble would be unwise.
But in an odd way, the Internet bubble has left all of us better off, as it created the global communications backbone for the current generation of more successful internet services (e.g. YouTube, Facebook).
Advisers can play a crucial role in preventing investors from chasing hot sectors. Diversification may be boring and hard to defend in rising markets, and harder still in extreme falling markets, but remains the adviser and investors’ best friend. Diversification is a risk management strategy as much as a return seeking strategy. Diversification may not work all the time, but it will work over the course of time.
An adviser should evaluate the merits of any new investment product, in terms of both risks and rewards to the portfolio, and whether those opportunities are warranted to help the client achieve their goals. Future returns don’t depend on the best investment story, but the price which you pay to access opportunities.
That was true for technology in the 90’s, it’s true for emerging markets today and will be true for whatever new shingle comes your way next.
Kajanga Kulatunga is an investment specialist at MLC
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