Ten years after the dotcom bust, it's time to buy tech
By
Associate Editor
David Stevenson Mar 16, 2010
Print this article
It's now a full ten years since it peaked. For many who watched the tech bubble inflate, the biggest surprise was that it survived for so long. Investors fooled themselves into paying insane prices for companies that were, in essence, completely worthless.
It's an object lesson as to just how long markets can defy gravity. And it shows just how much damage a bursting bubble can do. A decade later, the 'tech' sector overall has nowhere near recovered.
Yet this may be about to change. Here's how to buy in...
The dotcom bubble was one of the worst in history
Over the last two or three years, we've got very used to seeing a series of bubbles inflating fast, then bursting with very big bangs.
Chinese stocks rocketed by 3.5 times in the 12-months from September 2006. Yet a year later, they were back to where they'd started. Then oil took up the baton. By mid-2008, crude prices had spiked to a level almost twice that of today. Meanwhile house prices on both sides of the Atlantic went completely berserk. Sanity has since returned to the US – as we reckon it will soon do over here (Don't be fooled - house prices will fall again).
So it's quite easy, then, to forget 'dotcom'. But it was a similar story – except that it became even madder – "a bubble as insane as any in history", as John Authers puts it in the Financial Times.
For those that don't recall it, here's a quick potted re-cap. Cash was very easy to get hold of, and new technology was seen as the 'in thing' to spend it on. But just as inflation is often described as too much money chasing too few goods, so it was with dotcom.
Companies were springing up all over the place with little scope for achieving serious sales, let alone generating cash flow and profits. But there was a mountain of hype, and investors were happy to swallow it.
Share valuations were bid up to stupid levels. Everyone with a website was a likely millionaire. Common sense went right out of the window.
Imagine how much fun it was – not – trying to run a small cap value fund, i.e. having to hold stocks in the most disliked sector of the day, as I was in the late-1990s.
Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?
- Why UK property prices are going to fall 50%
- When it will be time to get back in and buy up half price property
It was all summed up by the Nasdaq Composite index, the world's most widely watched gauge of technology-related companies. On Friday 10 March 2000, after rising five-fold in just four years, it hit an all-time high of 5,049 in an atmosphere of frenzied excitement.
But when markets re-opened after the weekend, suddenly it was all change. Monday 13 saw the index plunge by 4%. Two and half years later, the Nasdaq Composite had lost more than 75% of its peak value.
The dotcom bust brought down other stock markets with it. Most of these, mind you, have since revisited their old highs, even if they've not been able to stay there. Yet the Nasdaq Composite is still more than 50% lower than March 2000. So many investors are still nursing hefty losses – and many of the shares they bought are no longer trading.
Of course, not every tech stock has been wiped out. Amazon is up by about 50% over the past ten years. And if you'd bought some of my colleague Eoin Gleeson's technology tips last year, you'd have made that sort of profit a lot faster.
Tech stocks finally seem worth investing in again
On balance, though, surely the depressed level of the index means that the broad tech sector is still a busted flush?
Actually, no. By early–March 2009, the Nasdaq had almost fallen back to its 2002 lows. But the last 12 months have seen investors' confidence start to return.
And here's the interesting bit. You might have expected 2009's rally to go hand in hand with a pick up in the number of firms being taken over. M&A (merger and acquisition) activity often fires up stock prices.
But it didn't here. Takeovers actually fell in both value and volume terms last year. The total value of completed deals dropped by 53% to $36bn compared to $77bn in 2008. Meanwhile, the number of transactions plunged from 195 to 108.
2010 could be a very different story. The tech sector is sitting on a cash war chest of a net $200bn, says PriceWaterhouseCooper's Rob Fisher. He reckons that "as companies around the world rekindle technology purchases, as long as the broader economy can avoid slipping back into recession, we expect 2010 to witness a return to more robust deal making".
In other words, much more M&A could be back on the menu. And that means – at least ten years later than many punters thought – there could now be some decent profits made by investing in tech.
Clearly, though, this isn't a sector without risk. The rather iffy economic outlook could still be the fly in the ointment. And trying to pick the right stocks won't be easy.
Two tech funds that look good value
In the magazine over the coming months, we'll be trying to spotlight the ones we think are the best bets this year (if you're not already a subscriber, you can claim your first three issues free here). But there's something to be said for buying into a tech fund. The Polar Capital Technology Trust (LSE: PCT) and the RCM Technology Trust (LSE: RTT) are investment trusts that specialise in the sector.
Both are trading on discounts to net asset value of around 9%, so you're effectively buying £110 for every £100 you invest. And both have as their largest holdings some of the biggest and richest US tech companies, who are likely to spend their money much more wisely than their predecessors did ten years ago.
Our recommended article for today
Calm has descended on the markets. But this stability won't last forever. Sooner or later, something will stir things up. Here, Bengt Saelensminde explains how you can profit when volatility returns.
Published in
Tips & advice
| More
articles
by
David Stevenson
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.