What a ride the markets have given investors this year! Just when we thought that “old economy” stocks were dead forever, they spring back to life and remind everyone that having profits and good fundamental business is still fashionable in some circles. Financial stocks and consumer goods have rebounded nicely as technology goes through amazing extremes.
“But it's different this time”; “It's the new paradigm” and “Times have changed and this is the way of the future.”
These were all very popular arguments as to why technology could sustain price earnings at 245 times. Traditionalists, rationalists and statisticians argued that no matter how good the story was, technology was over-priced! In the end, I think both camps had merits and while you will often find me sitting on the fence, it's my conservative nature that comes out here.
Technology is the way of the future and has changed the way we do things. However, technology was also over priced largely due to “INVESTOR IRRATIONALISM”. Let me explain. Investors bought into technology so much that they forgot that every story comes with a price. Yet investors were willing to pay ANY price for a good story. You can believe and understand but at some point you must determine the value of the story. Many of these technology companies were not making profits. Prices rose on speculation of technology or product breakthroughs. You don't buy a good story at ANY price.
Is this the time to buy?
Great question! Is technology still a good story? Yes! Is technology the way of the future? Yes! Does that mean all technology stocks will come back? No!
Some experts will argue that technology is still over-priced by conventional thinking. Conventional wisdom sometimes forgets that ‘Price' alone is only one dimension of stock analysis. Cheap stocks can get cheaper and expensive stocks can get more expensive.
Technology is probably a good buy today but you still have to have the stomach for market volatility.
The professional market
We have just gone through a time I call the “amateurs” market. This means that anyone could have made money in technology. Even speculative dot.com stocks without rational justification were riding the techno-wave.
As this market shakes out, we move into the “professional” phase where good research and quality will prevail again. Not all tech stocks and tech funds will come back. While everything has dropped purely on emotional selling, only good quality stocks will come back. We move to good information, fundamental analysis and good research. So buy carefully and cautiously!
Advice for investors
If you have a flair for risk, adding a small amount of exposure directly to technology is not a terrible idea. Although price earnings are still relatively high compared to old economy stocks, we think there is a future for technology and prices today are more reasonable.
If you might want to play technology with a little less risk than buying a technology fund, try one of the popular multi-manager funds. These funds will reduce the risk of technology by diversifying into different sectors of the economy.
Finally, if you are concerned about high valuations and speculation in the markets today, Ralf Kaiser of Templeton Funds thinks you should take a look at a fund like the Templeton Growth Fund, “This fund by every fundamental measure is cheap and represents a great value buy. This fund is 94% cheaper than the NASDAQ and 50% cheaper than the MSCI world index.”