Fighting the Stock Market: 2001 Over Again?

I became a technology stock research analyst by accident. I was talking to a big-time investor back in 2000. I made indexes for technology books back then; one of my clients was Microsoft Press. He wanted to invest tens of millions of dollars in Linux startups. I told him I did not think it was a good idea. The Linux startups (see Red Hat) were already priced as if they had defeated Microsoft in the field of battle, yet they had made no profits and had little to show in sales. I explained that Linux was not ready for prime time, and more to the point, it was free. How much money could be made on a free product? I said that most of the switching to Linux would come from UNIX sellers, which meant that IBM and Sun would be hurt far worse than Microsoft.

I owned no stocks in 1999. Today I own Microsoft but not Red Hat. But today is not 2000. If someone want's to buy Red Hat today, and was a client, I would make up a report of the downside and the upside. Today Red Hat has substantial sales, makes a profit, and has a Price to Earnings ratio that is steep but not much out of line with its growing prospects. It has diversified around Linux. It has a bunch of competitors, including Novell (NOVL). On the other hand Sun, while it is not out of the woods yet, at least has a realistic stock price. It had substantial profits in 1999, but its stock price was still more than an order of magnitude higher than what its actual numbers could support.

Military historians often attribute the loss of battles and wars to generals who were still stuck in the tactics or strategies of the past. Remember the investors who failed to panick early enough in 2000-2001? Or rather, they should have analysed the companies in their portfolio, rather than buying into a bunch of bull and having to time their panick.

Now some people are acting as if it is 2001 and dumping tech stocks due to the China panick of last week. Take a good look at some of the stocks they are selling. They are profitable and have attractive PE ratios. They are still growing. Their main sources of growth are often Asian markets that are growing strong. Yes, a recession in the US would hurt their earnings. No, none of them looks like the next Microsoft. But they are worth something. And if there is no recession this year, they are going to be worth substatially more than people think today when 2007 is over.

Look at the numbers. Take into account what management has to say by reading my summaries of analyst conferences. Diversify; prefer substance to rhetoric. You'll beat not just the small investors who don't do their homework, but plenty of the professionals as well.