FOOL'S EYE VIEW
The Next Fad

By Alan Oscroft
July 12, 2001

Carburton Street, London -- I've read a few posts over the last month or so on the subject of timing the recovery of technology companies. "When is the best time to get back in?" ask some, and "Knowing what I know now, I'll be able get out in time next time" claim others. The truth, though, is that there won't be a next time. There won't be another crazy few months during which all tech stocks suddenly become ten-baggers. The tech stock fad has been and gone, and it won't be back.

But like most truths, this is only a half-truth. Though this particular fad won't be coming back, others will take its place. And they'll all work the same way. The reason will be the same too; people chasing "the next big thing".

Emerging Markets

Perhaps the most obvious investing fad from before the recent technology one was the mania for Emerging Markets. The tigers of Asia were on the rise, and people from all over the world were putting their money into countries that they probably couldn't find on a map. The financial institutions, always the experts at spotting something that has already happened, joined in too and exhorted people to put their money into places like Japan (because its stock market had already gone up a lot), and Korea and Thailand (because their economies had already enjoyed several years of double-digit growth).

But just as overvalued telecommunications companies eventually revert to sensible valuations, so did the Japanese stock market. And those unsustainable Asian growth rates came back to earth with a bump too.

Greed

There are really only two things that contribute to a fad boom and bust, and they're both psychological. First is greed. People aren't prepared to put in the time and effort needed to follow a sensible long term investing strategy, but they still want the big rewards. Not being content with aiming for returns that match or modestly beat the market, they want big money for little effort.

So off they go in search of the aforementioned next big thing. "If only I can get the next one right, I could easily make a fortune overnight", they think. Ah, if only it were so. The reason they can't do it is the other side of the greed coin...

Ignorance

How often have you heard it said that you should only invest in what you understand? "Buy what you know" is one of the oldest and best investing tips there is (even if it is frequently misused and misunderstood).

So, of all those who invested in technology companies near the peak of the bubble, how many really understood the businesses of the companies they were buying? Most, if honest, would admit they didn't really understand them. Some would firmly, though mistakenly, believe they did understand them. And a small number of people really did understand the technology they were buying into.

It was the same with emerging markets too. Did you put some of your pension money into "Asia" in the eighties? Plenty did. Most were clueless about the economies and businesses of Asian countries.

So When Will Tech Stocks Bounce?

There are some who think that no high tech company will ever make a sensible investment, and that the recent boom and bust proves it. They're just as wrong as those who thought they were on to a sure fire winner. Any good company, whatever its sector and its risk, has a price at which it is worth buying. The difficulty is working out that price, and for that you need to understand the company.

But however you invest, there are a few simple things to keep in mind that will help to keep you clear of the fads as they come along from time to time.

Just remember that there are no good and bad sectors, no good and bad countries, and no good and bad times. There are only good and bad companies, and good and bad prices. If you stick to buying good companies at good prices (and it's always the right time to buy those, if you can find them), you will stand a very good chance of doing well. But if you buy bad companies (at any price), or good ones at bad prices, you'll most likely end up poorer.