Published March 05, 2013
Guess who's back on top? No, it's not Paul Krugman and neither is it the Chicago Bulls. It's the Nasdaq Composite - that wretched technology heavy stock index you've grown to hate.
Today, the Nasdaq (NasdaqGS:ONEQ) reached 3,223 for the first time in 12 years, according to enthusiastic media reports. Never mind that Andrew Mason, (Groupon's former CEO) got canned last week. Tech, if you're on the right side of the market, is still a great racket. (See Andy's $225 million in Groupon stock as proof.)
How thrilled is everyone?
So thrilled, even ancient business jargon like "new economy" and "first mover advantage" have returned. Friending and tweeting (NasdaqGS:SOCL) are still cool too. (zaibatsu is only cool if you work at Kleiner Perkins or a simliar beast.)
The Nasdaq's 12-year odyssey has been grueling. To give you some perspective on just how long 12 years is, if you were 9 years old, now you're the legal drinking age of 21. And if you were 58, now you're 70 or close to it - which means mandatory distributions - and taxes - from your retirement accounts await you. Joy of joys!
And while the Nasdaq's upward march (in March its favorite month!) is impressive, the benchmark technology index is still a bothersome 57% lower compared to its closing price of 5,048.62 on March 10, 2000. (I had to include some bad news in this back from the dead story, to give it some balance and to throw a few cheap shots at the tech sector, which has doled out more than its fair share of dogs.) The basic translation is that you can't produce superior investment results if you're buying the same assets at the same prices as everyone else, particularly at market peaks.
The Nasdaq Composite measures all domestic and international stocks listed on the Nasdaq Stock Exchange (NasdaqGS:NDAQ) - which doesn't necessarily make it a technology index per se. Nonetheless, with more than 49% of its exposure is to technology stocks, its fortunes are closely linked to how the sector performs. (Side Note: By comparison, the much smaller Nasdaq-100 (NasdaqGS:QQQ) which excludes financial companies, has almost 63% exposure to technology.)
Here are a few lessons we learn from the Nasdaq Composite's slow climb back to 12-year highs:
Large losses are virtually impossible to recover from. People that consistently lose money in the stock market often double or triple down on their losers. As a result, they end up taking greater financial risks in attempt to recoup their losses, which almost never works. A $500,000 investment that loses 50% in value needs to experience an incredible 100% gain just to get back to even.
Big gains from investing in stocks can take decades, but large losses can occur in a flash. It took the Nasdaq Composite decades to reach its pinnacle point of 5,000. But after hitting that amazing level, it took the Nasdaq just nine months to be cut in half and another 24 months to fall 75% from its peak.
Focusing your net worth in one stock or one industry sector is always a gamble. Great wealth can be obtained by concentrating investments in one fantastic performing area, but it can also massively backfire and it often does.
People have short memories. The mere mention of the countless technology failures like Flooz, Kozmo, Nortel Networks, Webvan and others that have destroyed trillions in shareholder capital serves as no warning to people who suffer from financial amnesia. If they refuse to remember, nobody can make them.
There are always exceptions. In retrospect, even a dummy could've seen that LinkedIn (NasdaqGS:LNKD) would've been the stock to own instead of Zynga (NasdaqGS:ZNGA). But unfortunately, we don't live in retrospect nor can we invest in retrospect. There are always a very tiny number of winners in the stock market (NYSEArca:SCHB) - with an even tinier group of investors that are able to pre-identify those winning stocks before they become that way.
Finally, there are a few lucky kamikazes who bought stocks like Google (NasdaqGS:GOOG) at a 50% plus premium to its IPO offer price on the first day of trading and still made out like bandits. Hats off to you. Now I dare you to try it again.
The ETF Profit Strategy Newsletter uses a common sense approach to fundamental and technical analysis to identify key inflection points and profit opportunities in ETFs tracking stocks, bonds, and commodities.