By Whitney Tilson
April 17, 2000
As regular readers of my columns know, there was never any doubt in my mind that the speculative orgy that had come to characterize the hottest sectors of the market -- which included large segments of the technology sector -- would come to an end and common sense would again prevail. But I had no idea that it would happen so quickly. Was it only five weeks ago -- March 10 to be precise -- that the Nasdaq peaked? Not coincidentally, that was the same day that the stock that represents the antithesis of tech hype, Berkshire Hathaway (NYSE: BRK.A), bottomed at $40,800/share, a low not seen since early 1997. Not long before, I wrote in The Last Bull on Berkshire?: "I think it is highly unlikely that Berkshire Hathaway has turned into a dog of a business or that [Warren] Buffett, after more than 40 years of investment genius, has become a fool -- yet that's how the stock is being priced today. I don't know when, but Buffett will be vindicated, and I intend to profit from it." Since March 10, the Nasdaq is down 34% and Berkshire is up 42% (all prices in this column are through Friday's close).
I'd like to use the rest of this column to share my thoughts on what we can learn from the Nasdaq's meltdown and what the future might hold:
In conclusion, my advice is to take a deep breath, be thankful that you're fortunate enough to have any money to invest at all (I know many people who don't), and if you've made mistakes that were exposed recently, be very honest with yourself so that you can learn the right lessons from what happened.
- Many fear that the market will continue to decline. It may -- I have no insights on this (and am skeptical of anyone who claims to) -- but I have not spent a moment worrying about it. If you have confidence in the future prospects of the companies you own, then selling because they have become less expensive would be absurd. If you know what you own, why you own it, and have some idea of what it's worth, then all other things being equal, a price decline makes a stock more attractive, not less. Thus, if you have any cash to invest, this is an excellent time to identify buying opportunities. Times like these, when others are panicking, are when the big money is made.
- If your portfolio has been crushed in the past month or so, this could be the best thing that ever happened to you if you learn the right lessons. If not, then your losses are for naught. I'm embarrassed to admit that I only adopted a sensible, long-term investment strategy after I'd lost some money rashly speculating.
- Are you beating yourself up for not selling a month ago? If so, then I think you need to seriously reevaluate your investment strategy. Those with a well-diversified portfolio of quality companies haven't been hit that hard recently, and even a 10-20% decline is an insignificant blip. Long-term investors pay no attention to short-term stock gyrations -- other than to take advantage of buying opportunities -- and don't engage in market timing. In contrast, those who have been speculating are likely holding a number of stocks that have recently declined 50% or more. But the lesson is not that the stocks should have been sold sooner -- it's that speculation is a bad idea to begin with. The fundamental lesson here is best summarized by Warren Buffett, who said that if you wouldn't hold a stock for 10 years, then don't even think of holding it for 10 minutes.
- Make no mistake -- the speculative party is over, at least until a new generation of investors forgets the lessons that are being all too painfully learned today. Don't get me wrong -- high-quality technology companies with proven economic models and enduring competitive advantages will rebound eventually (at least I hope so, as I own some of them). But stocks trading on hype and momentum and little else aren't going to snap back as they have in the past. Most of them are going to penny stock land, where they belong. Thus, don't fall into the trap of believing that a stock is a good buy simply because it has declined significantly. Even though they have already fallen precipitously, for most stocks trading on hype rather than fundamentals, my general recommendation is to dump them immediately and make a solemn vow never to buy such rubbish again (and if you were rash enough to use margin, add that to your vow of something never to do again).
- Have you found yourself emotionally distraught over the past month? Have you sold stocks that you felt were undervalued in companies in which you still believe because you feared further losses and couldn't take the pain? If so, you may not have the temperament to be a successful long-term stock picker. I suggest reading my columns on The Arrogance of Stock Picking and The Perils of Investor Overconfidence for more on this topic.
- Valuation matters. Except for temporary bouts of insanity, this has always been true and will continue to be true. To successfully invest in stocks in the future, you will need to be able to think sensibly about valuation. Otherwise, funds are a better option.
- If you decide to forswear stock picking, I highly recommend index funds rather than trying to pick mutual funds that will outperform. While a majority of actively managed funds have beaten the S&P 500 very recently, that's because they piled into the hottest sectors and are now paying the price. Over longer periods, index funds have always beaten the great majority of actively managed ones, and are virtually certain to do so in the future.
- My opinion on blue-chip tech stocks is that I'd love to add to my positions, but unlike the last time the Nasdaq cracked (in August and September of 1998, when I was an eager buyer), they're just not cheap enough yet. In fact, the stocks of the 17 largest (by market cap) U.S.-based technology companies have fallen -- after an enormous run-up -- only an average of 18% since March 10, approximately half that of the Nasdaq. Since the Nasdaq is market-cap weighted, this gives you an idea of the carnage in the tech sector outside the blue-chip stocks.
- Events of the past month have made a very compelling case for diversification. Though the Nasdaq has taken a beating, the S&P 500 is down only 11% from this year's high a few weeks ago, and is about where is was in mid-March -- fairly remarkable, given that approximately one-third of the S&P 500 is in tech stocks.
- While I don't make macroeconomic forecasts or pay attention to the predictions of others -- numerous studies have shown that economists' forecasts are worthless -- nothing in the past month has changed my opinion about the bright prospects of the U.S. economy and the future profitability of American corporations. The economy continues to amaze, corporate earnings are growing rapidly, and inflation, despite a recent uptick, remains benign.
- I am fed up with Wall Street and the media. Far too many innocent people have been hurt badly because, not realizing the risks, they were drawn into the speculative frenzy created by Wall Street -- with an assist from the media. Now, the media has swung to the opposite extreme and is scaring people out of even quality stocks. If you look closely, the true carnage has been limited to the areas where there was absurd speculation. It's healthy that these excesses are being curbed.
For more, see the Fool's Market Craziness special.
-- Whitney Tilson
Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous guest columns in the Boring Port and other writings, click here.