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Inside Wall Street Two Arrows

Tech Truths
by WealthEffect Staff
(Updated a bit — March 19)

 
 
In response to an October 16th Wall Street Journal article, "Here are Six Myths That Drove the Boom in Technology Stocks," here are six truths to consider during this severe sell-off of tech stocks:
 
 
1.

History repeats itself. Stock prices at any given time are determined by people, and people are driven by the same emotions regardless of the year or decade or century. Greed and fear fuel the occasional booms and busts, whether in stocks or in other assets.
 
 
2.

Over time, value wins out. You put up cash to buy a stock and your return is based on the cash you receive (discounted back to the present, which is another reason why interest rates are very, very important to tech stocks). You don't need dividends, or even earnings, anytime soon but you will eventually. This doesn't imply that tech stocks are based on the greater fool theory, not for the companies which can sustain strong growth. (And don't forget that stock options, which tech companies often grant in huge quantities, are a very real cost to investors.)
 
 
3.

Leadership has its advantages even if they're not unbeatable. Successful investing is based on sustainable competitive advantage which is hard to find when innovation is important. Nevertheless, being the dominant player sure beats the alternatives. As Henry II observed in The Lion in Winter, "God, but I do love being king."
 
 
4.

Things might not be different this time, but technology does make them a bit better. The Internet improves the prospects for business even though it doesn't reinvent the rules of valuation.
 
 
5.

Some companies deserve the benefit of the doubt — most Wall Street analysts don't. Well-managed, dominant tech companies are worth considering when the news seems bad and analysts are pulling their recommendations. Bear in mind that Wall Street analysts are under intense pressures to be right in the short run which is a really good way to be wrong in the long run.
 
 
6.

History repeats itself — or so we've heard.
 
 


Suggestion: Go to Options — Beyond the Numbers