Bursting Bubbles

David Gardner:The Motley Fool Radio Show is broadcast every week from Alexandria, Va., just across the river from Washington, D.C., and the wind blowing our way these days is Social Security reform. Professor Siegel, what is your opinion of that effort?

Professor Siegel: I am all in favor of personal accounts. It is not so much I think it is going to solve the question of the demographics out there. I see young people who are starting to work, and they look at that 12.4% Social Security tax paid by the employer-employee and think it is going down a hole, a black hole, and they are never going to see it. They laugh when we call it a contribution to your pension fund. I think that they should see that money. Even if they just put it in bonds to start out with.... People will really say, "I am working for something." I think that could stimulate a lot of saving. I think it could stimulate work effort. I think that is the most important thing about personal accounts.

David Gardner: Professor Siegel, in March of 2000, you wrote an article for The Wall Street Journal. You entitled that article "Big Cap Tech Stocks Are a Sucker Bet," or maybe The Wall Street Journal titled that article. Sometimes, the papers themselves come up with the titles, but how right you turned out to be, at least over the past five years. Is there a sucker bet in the current market?

Professor Siegel: You bring up an interesting point here. I was often feted for that great timing there. Of course, I teach all my students there are no gurus in the market. It was lucky. We knew the bubble had to break. Many of us, including you, were saying this can't continue.... Bubbles always go longer than you think, and I was lucky. I called it there in March of 2000, and it began to break down.

Really, there had been little bubbles that have come in, (like) a little nanotech bubble that we had I think about a year ago. Of course nothing equaled to the magnitude of what we had in the Internet and the tech stocks. Right now, I have been cautious on tech. I still think the full impact of expensing options, which I talk about in my book, has not yet been felt.

In general, tech stocks are so much more reasonably priced than they were in the late '90s. They are not as cheap as the early '90s. In fact, in my book, in my study, I say the early '90s. And that was mostly caused by the tremendous losses of IBM (NYSE: IBM  ) , which shook everybody's confidence in tech. They actually became undervalued. The average P/E dropped below that of the rest of the market, which is unheard of for tech stocks. Then, of course, we got the steady rise in March into the bubble after that.

We are not there yet. P/Es on tech are still higher than the rest of the market, but they are close, and they are close to their historical norms. I'd like to see a little bit more, a little lower prices, recognition of those option expenses, and then hopefully you won't have to underweight technology anymore in your portfolio.

David Gardner: We will close with our game, as we have in the past: "Buy, Sell, or Hold." You have played it before, Dr. Siegel. I will be throwing out things happening in the investment world and ask you if they were stocks, which they are not, but if they were, would you be buying, selling, or holding, and a sentence as to why. You ready?

Professor Siegel: Yes.

David Gardner: OK, let's start it off with investing in IPOs. Buy, sell, or hold?

Professor Siegel: Oh, that is a sell. A whole chapter in my book says that is just not a good strategy. If you get them at the offer price and they pop, sell them right away.

David Gardner: The housing market, let's call it housing futures, over the next five years. Buy, sell, or hold?

Professor Siegel: Here I am going to have to say "sell" again. And not a big sell; probably between a hold and a sell. I see interest rates rising, and that is going to put a lid on it. There has been some crazy speculation, as we know, in condos and in some other parts of the market. We have had a tremendous rise, and history is big rises followed by plateaus that last five to 10 years and then another rise after that, so I am going to say sell to hold.

David Gardner: The real chances for real Social Security reform over the next two years -- buy, sell, or hold?

Professor Siegel: There I am pessimistic. I wish I could say (they are) great, but I am going to have to say that is a sell. I think the American public is not quite ready for that, and the president hasn't enunciated quite enough of a plan that catches enough people, so I don't think it is coming soon. It will come later.

Catch The Motley Fool Radio Show on astation near you.

David Gardner is co-founder of The Motley Fool and is chief analyst of Motley Fool Rule Breakers. The Motley Fool isinvestors writing for investors.


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