It's enough to give you whiplash. The Nasdaq crumbles 68% from 5,048.62 on March 10, 2000, to 1,638.80 on April 4, 2001, only to leap 33% in the following two weeks and a cumulative 41% a month later. From ululations of "capitulation!" one moment to the running of the bulls the next. Have we really gone from bear to bull? Should it matter to investors? Your favorite Motley Fool writers say no. Here's why:
Bill Mann (TMF Otter), Senior Analyst
A scan of the headlines from the end of March says it all:
"Stop Looking: There's no 'V' in Bottom"
"More Atrocious Losses for Shares"
"Tech Stocks Drop Amid Warnings"
In almost all cases, market news was centered around a very few topics: the rash of earnings warnings from companies, the horrendous losses in stocks, and whether or not we were at a bottom, in a recession, or if Alan Greenspan was the antichrist.
Okay, not the last one. Still, funny how he was a genius last year and is a doddering idiot this year, huh?
Fast forward to mid-May. Thirty trading days and one miserable earnings season later and many of the most followed, most widely held stocks are skyrocketing. The Dow Jones Industrial Average is up 12%, the Nasdaq about 40%. Suddenly investors are making money again. It's just too bad that companies are not doing the same.
That's right. In spite of interest rates falling faster than David Caruso's career, companies are still in the same boat they were a month ago, with dwindling revenues, vanishing profits, and struggling customers. Of course, the stock market is legendary for anticipating changes in the economy, but it is just as well known for snuffing the dreams of the true believers.
An investor's best friends are information and what Warren Buffett calls "emotional IQ." Are you excited because your portfolio is green for a change? Great, but be sure to ask yourself why this is so. If your stocks rise but their underlying businesses fail to follow, you're in danger of being right back where you were in March: sad, confused, and materially poorer. The best investors are those who put 90% of their focus into the value of a business, not the price.
Jeff Fischer (TMF Jeff), Rule Breaker and DRIP portfolios co-manager; author, Investing Without a Silver Spoon
In the past, the average "bear market" has lasted about 12 to 18 months. A bear market is defined as a decline of 20% or more. From March 2000 to April 2001, the Nasdaq dropped about 68% at its worst point, making the decline the largest in the history of the index.
The recent jump in the Nasdaq that we've seen is, I believe, the result of three things: A natural amount of buying after a long, steep decline; people realizing that the economy may not be as horrible as feared; and the fact that stocks typically rise when interest rates are falling, and rates have fallen five times this year by one-half point each time. During the decline in interest rates, money in interest-bearing investments has been moving to stocks.
That said, I would avoid almost all stocks on the Nasdaq that have been beaten into single digits. A majority will never recover because they aren't good businesses. Finally, in general, I would not pay much attention at all to what the market indexes do. Just focus on the businesses that you own, and make sure that they're excellent businesses. If you do that, then your investments should do well, eventually, no matter what the unpredictable indexes do. Although we can't predict what they'll do, I think that the indexes will remain very volatile, both up and down.
Rick Aristotle Munarriz (TMF Edible), Writer/Analyst
Looks like Yogi Bear made a Boo Boo. The world didn't exactly end. Investors didn't run to the hills and load up on gold bricks and canned meat. Then again, the only thing that came close to matching this year's unbridled pessimism was the blind optimism that preceded it. Neither scenario was realistically sustainable.
Thankfully, the market's lashings have made companies more accountable. They've become more preoccupied in fine-tuning their vision rather than trying to land on the CNBC guest seat. The economy itself may not bounce back immediately, but when it does, you'll see driven, focused companies -- most
worthy of your attention. Many worthy of your portfolio. It was opportunity knocking in bear's clothing. Who would've thunk it?
Richard McCaffery (TMF Gibson), Rule Maker Portfolio co-manager
Market movements are easy to measure and easy to spin into shabby forecasts, which makes for good dialogue on business talk shows, but they have very little to do with investing.
It's a little bit like the weather. It's useful knowing the forecast if you're going to the park. But if you're staying inside all day, what does it matter, really? Your well-being is based on an understanding that, long term, the sun will shine.
My grandmother, who lived in an apartment in Brooklyn all her life, fretted over the weather as she grew older, long after she stopped going outside. This is very human, but it didn't make much sense. I wouldn't want this kind of thinking guiding the hand that manages my investments.
Similarly, if you're investing for the long haul based on business fundamentals, how important are daily market moves? Better to spend your time learning more about the companies in your portfolio.
Unless the market is giving you a chance to buy a good business at a solid price -- the kind of opportunity vigilant investors hunt for -- then the day's market movements are all sound and fury, all hat no cattle. This doesn't mean the market can't provide clues. For example, when the Federal Reserve hikes interest rates and the market wobbles, it's a good time to look closely at financial services companies. Unless interest rates stay high forever, you might get a good company at a discount. This isn't pretend forecasting. It's smart hunting.
Brian Lund (TMF Tardior), Rule Breaker Portfolio co-manager
Media comments on the market stupidly focus on extremes. Not only do we hear only about the biggest gainers and losers in a day, but stock histories are gauged by their highs and lows, as if they were in some way definitive. "Cisco
So the Nasdaq is up 40% from its low. That doesn't tell me much of anything, not even about the market's history. What is its compound annual growth rate over the last 10 years? Answer at the end of March: 14.3%; Answer at the end of April: 15.9%. That tells me that we were and are probably still living on fat, having gotten returns out of line with corporate earnings. With some more digging, I might be able to say something useful about the state of the market (though I still couldn't say much about its immediate future). That it's an according-to-Hoyle "bear" or "bull" today is totally meaningless.
Zeke Ashton (TMF Centaur), Editor, TMF Select; Rule Maker Portfolio co-manager and Foolish 8 strategy manager
"As far as I am concerned, the stock market doesn't exist. It is there only as a reference to see if anybody is offering to do anything foolish." --Warren Buffett
So the Nasdaq has recovered from its lows of 1,600 to almost 2,300 of this writing. That's about 40% in a month and a half! Does that mean irrational exuberance again? Perhaps my take on the market doesn't make for great copy, but I don't think the recent large percentage gain means much of anything. I'm not here to sound the warning sirens, because I have no clue where the market is going. I wouldn't be surprised to see the Nasdaq go up to 3,000 from here or back to 1,800.
For most individual investors, unless you have loaded up with the Nasdaq 100 index trust
There are opportunities with the Nasdaq at 2,300 as well, but they won't jump at out you. They reside where they usually do -- in the places nobody wants to look. Investing is the pursuit of companies whose shares trade below their intrinsic value. Worrying about the absolute level of the market appears is a foolish (little f) use of one's time and energy.
Todd Lebor (TMF Tee Time), Rule Maker Portfolio co-manager
I can feel it now. That "I'm-a-champion-investor" surge that coincides with the market's rise. But, like teeing off on a 580-yard par five, I've got plenty of work left to do. One good shot -- or a few good months -- doesn't mean I'm in the clubhouse with a record score. Perhaps the two most humbling powers in the universe are golf and the markets. Golf can turn even the most powerful men and women into second-guessing, quivering little wimps. One minute, you're high as a kite (like yesterday) and the next you're punished by a lack of concentration.
Keep your concentration and don't get too excited about the Nasdaq's return to 2,300. Remember, it was there in March 2001 and January 1999 as well. Concentrate on your investments, not the market. Fools buy companies, not stocks, and even though the Naz may shoot back up to 3,500 or even 4,500, you still can't break par!
Selena Maranjian (TMF Selena), Newspaper column editor; author, The Motley Fool Money Guide
Dang! I'll admit that I was a little rattled when the Nasdaq fell so much. (My portfolio was more than rattled.) But I had come around to see the downturn for what it really was for a long-term investor such as myself: a buying opportunity. All of a sudden, the dollars being regularly plunked into an index fund through my 401(k) were buying significantly more shares than they used to. A lot of companies that I'd been wishing I owned shares of were suddenly trading at much more attractive prices. So now the Nasdaq appears to be slowly clawing its way back? Dang.
To see any Fool writer's stock holdings, view their profile, accessible from The Motley Fool's disclosure policy page. Brian Lund owned no shares of Cisco at press time.
Each opinion is that of one Fool only and should in no way be taken as the opinion of The Motley Fool Inc., any specific company, or as representative of anyone or anything other than that specific Fool's thoughts. You think we'd own up to any of these people?
