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
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 1/2 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
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
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
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
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.
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