Showing posts with label technology bubble. Show all posts
Showing posts with label technology bubble. Show all posts

Thursday 4 August 2016

A Random Walk Down Wall Street - Part One 5: Stocks and Their Value

Chapter 4. The Biggest Bubble of All: Surfing on the Internet

1. The NASDAQ Index, an index essentially representing high-tech New Economy companies, more than triples from late 1998 to March 2000. The P/E ratios of the stocks in the index that had earnings soared to over 100.

2. Amazon sold at prices that made its total market cap larger than the total market values of all the publicly owned booksellers such as Barnes & Noble. Priceline sold at a total market cap that exceeded the cap of the major carriers United, Delta, and American Airlines combined.

3. Cooper, Dimitrov and Rau found that 63 companies that changed their names to include some Web orientation enjoyed a 125% greater increase in price during 10 day period than that of their peers. In the post-bubble period, they found that stock prices benefited when dot-com was deleted from the firm’s name.

4. The relationship between profits and share price had been severed.

5. Security analysts $peak up:
a. Mary Meeker was dubbed by Barron’s the “Queen of the Net.” Henry Blodgett was known as “King Henry”. Henry flatly stated that traditional valuation metrics were not relevant in “the big-bang stage of an industry.” Meeker suggested that “this is a time to be rationally reckless.”
b. Traditionally, ten stocks are rated “buys” for each on that is rated “sell.” But during the bubble, the ratio of buys to sells reached close to 100 to 1.

6. The writers of the media: the bubble was aided and abetted by the media – which turned us into a nation of traders. Journalism is subject to the laws of supply and demand. Since investors wanted more information about Internet investing opportunities, the supply of magazines increased to fill the need.

7. The result was that turnover reached an all-time high. The average holding period for a typical stock was not measured in years but rather in days and hours. Redemption ratios of mutual funds soared and the volatility of individual stock prices exploded.

8. History tells us that eventually all excessively exuberant markets succumb to the laws of gravity. In the early days of automobile, we had close to 100 automobile companies, and most of them became roadkill. The key to investing is not how much industry will affect society or even how much it will grow, but rather its ability to make and sustain profits.

9. The lesson here is not that markets occasionally can be irrational and, therefore, that we should abandon the firm foundation theory. Rather, the clear conclusion is that, in every case, the market did correct itself. The market eventually corrects any irrationality – albeit in its own slow, inexorable fashion. Anomalies can crop up, markets can get irrationally optimistic, and often they attract unwary investors. But eventually, true value is recognized by the market, and this is the main lesson investors must heed. 


A Random Walk Down Wall Street - The Get Rich Slowly but Surely Book Burton G. Malkiel
http://people.brandeis.edu/~yanzp/Study%20Notes/A%20Random%20Walk%20down%20Wall%20Street.pdf

Friday 22 June 2012

Investor's Checklist: Technology Software

The software industry has economics few industries can match.  Successful companies should have excellent growth prospects, expanding profit margins, and pristine financial health.

Companies with wide moats are more likely to produce above-average returns.  But superior technology is one of the least sustainable competitive advantages in the software industry.

Look for software companies that have maintained good economics throughout multiple business cycles.  We prefer companies that have been around at least several years.

License revenue is one of the best indicators of current demand because it represents how much new software was sold at a given time.  Watch for any license revenue trends.

Rising days sales outstanding (DSOs) may indicate a company has extended easier credit terms to customers to close deals.  This steals revenues from future quarters and may lead to revenue shortfalls.

If deferred revenue growth slows or the deferred revenue balance begins to decline, it may signal that the company's business has started to slow down.

The pace of change makes it tough to predict what software companies will look like in the future.  For this reason, it's best to look for a big discount to intrinsic value before buying.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Saturday 13 March 2010

Nasdaq 10 years on: how the tech sector went from boom to bust


Nasdaq 10 years on: how the tech sector went from boom to bust

A decade after the end of the tech boom, the sector is undergoing a renaissance – and fund managers and investors have sharpened up their stock-picking skills.

Nasdaq 10 years on: how the tech sector went from boom to bust
Nasdaq 10 years on: how the tech sector went from boom to bust Photo: REUTERS
A decade ago the technology bubble was about to burst, having reached a peak on March 10. The golden goose that had been so hyped up by everyone from independent financial advisers to first-time investors crashed and burned.
At the height of the technology boom in the UK there were 35 investment funds in the sector; now there are just 10, with the smallest holding only £3m under management. An outlay of £1,000 in the worst performing fund- Axa Framlington Global Technology, just before the crash a decade ago would now be worth a paltry £244.


At the start of the millennium investors could not get enough of technology. The huge returns that the sector had seen in the previous five years created a buzz that investors found irresistible. If you had invested £1,000 in the sector five years before the crash and cashed in your investment in March 2000 you would have seen your investment grow tenfold – and in the 10 years previously if you had picked your stocks right you could have turned £1,000 into £100,000.
By far the most popular fund at the time was Aberdeen Technology, the fund with the best track record. Ben Rogoff, now manager of Polar Capital's Technology trust, was on Aberdeen team during the technology rush. "Investors and managers alike were clamouring for technology funds," he said. "The attitude was that old investment truism- the only thing worse than losing money is watching someone else make it."
In the first three months of 2000, £567m was poured into tech funds- 10pc of all the money invested in unit trusts over that period. British technology funds totalled £3.4bn – £3bn more than the amount invested at the end of 1998, and with £1bn of the total being invested in February and March alone.
The deregulation of the telecommunications industry in both America and Britain in the mid-Nineties sparked the upturn as new companies were launched to rival BT and AT&T. Roads were dug up to lay cables and demand for technology increased. The launch of the Microsoft's Windows 95 software made the internet accessible to households and not just companies.
Telecoms companies' share prices increased as demand grew and technology funds returned profits. New internet browsers were launched and companies 'piggybacking' on BT lines were set up to cash in on the demand for the web at home.
The 'Y2K' phenomenon – also known as the millennium bug – forced companies to upgrade their computer systems as old systems' date functions were based the last two digits of the year and were said not to have the capability to work after 1999. This also generated cash for the industry, and led to a period of very rapid growth for the technology sector.
Hungry for their piece of the cash cow, 'blue sky' companies were launched, raising capital off the back of nothing more than a business plan and hugely inflated valuations.
Mr Rogoff recalls how in early 2000 Aberdeen saw as much money invested in just three days as half of the fund's total worth when he joined in 1998. "It seems unreal now, looking back. Unless you were there it is difficult to explain," he said. "I do have regrets."
The sector was flooded with capital and companies couldn't deliver their projected earnings. The industry reached saturation point and the market crashed.
"All our contacts were in IT departments," said Stuart O'Gorman, the manager of Henderson's Global Technology fund. "They were saying this and that were the next big thing. People got ahead of themselves and spending and projections were overly optimistic."
It wasn't just the technology funds that suffered in the dotcom crash. Many ordinary funds had high exposure to tech stocks. For example, Dresdner's RCM Europe fund, Invesco's European and Henderson Small Companies funds were among those to have almost three-quarters of their respective portfolios in technology-related stocks.
Of the companies launched during the dotcom boom, the vast majority are no longer around today. Similarly, most of the funds have merged or been closed. But in the past five years the technology sector has slowly been growing in value, outperforming the average unit trust and emerging unscathed from the global market crash of the past couple of years.
The technology sector is debt-free, and finally proving to be a driving force in the economy. When Amazon.com was launched, commentators assumed that it would mean the instant death of the high street bookstore. While that prediction proved to be overstated, Amazon has grown to be a retailing giant.
Mr O'Gorman said: "My mentor Paul Kleiser, former manager of the Henderson fund, always used to say, 'The problem with technology is everything that is predicted happens, but always five years later than promised.' I think that's definitely true."
One example that proves Mr Kleiser's point is 3G mobile technology. Five years ago 3G phones were bricklike, and consumers were being sold the idea that soon we would all be walking along the road video calling one another. This idea never took off but Apple's iPhone, which utilises 3G technology, has revolutionised the mobile phone market.
Consumers can now get home-speed internet on their mobiles, wherever they are, using technology that was developed nearly a decade ago.



http://www.telegraph.co.uk/finance/personalfinance/investing/7414651/Nasdaq-10-years-on-how-the-tech-sector-went-from-boom-to-bust.html