Goodnight, and Goodbye

by Paul Mampilly

On January 14, 2000, the Dow Jones Industrial Average powered by the 1999 addition of Intel & Microsoft lurched to an all time high of 11,908.50. Remember those memorable days? Those were heady times when investors monitored the value of their investment accounts every few minutes. Some tortured few even had to the face the indignity of having to call in, as their brokers had not yet begun to offer Internet trading. Then, “Hey, you never know” applied as much to the stock market as to the lottery.

Investors who jumped into the Dow at that time have been disillusioned. A purchase of the Dow at year-end 1999 has netted a loss of approximately 7% as of year-end 2005. That’s a pathetic 6-year record. The Dow’s performance has been so poor that it has even underperformed the lowliest of asset classes: cash.

After a nasty bear market from 2000 – 2003 and now a 3-year bull market, investors are finally perking up. The Wall Street Journal reported last week that individual investors are once again active and buying stocks. The disillusion has begun to break and optimism is returning. Disillusion was incapable of completing the job begun by the bear market. Despair, disillusion’s close cousin is expected soon and will and complete the job of knocking investor expectations to zero.

This would not be the case if so many were not still invested in stocks that marked those halcyon days. You know the names. Then, they went by monikers like the “Fearsome Foursome,” which referred to Microsoft, Intel, Dell and Cisco Systems. Please see our Risk & Return Grid for our ratings on these stocks.

These heroes of the technology stock bubble of 2000 are still widely held by investors. Despite diminished stock prices, these companies still sport massive market capitalizations. For example Dell’s market cap at its peak (using the current shares outstanding of 2.35 bill.) was approximately $140 bill. Today, even after the stock has declined by 51% from that peak, Dell’s capitalization stands at $68 bill.

That’s the good news, for both bulls and bears on Dell and many large cap tech stocks. For bulls, there is still time to get out with 50% of Dell’s peak value tucked safely in their pockets. For bears, inclined to speculate on Dell’s decline, there’s still plenty of room for additional depreciation in the stock price as in our view, the large cap tech sector will be a happy hunting ground for bears for a long while.

In looking up Dell on Yahoo! Finance we came across an advertisement (see picture of the ad inside our newsletter) from the Motley Fool that illustrates how deeply ingrained the technology bubble mentality is among investors. The advertisement announces, “Dell – It’s not too late. Investors who bought Dell early on are sitting on ridiculous fortunes.” Notice that there’s no mention of the stupendous losses suffered by those who bought Dell near the top. The advertisement goes on in breathless fashion to say, “But it’s not too late to get in.”

Editor’s Note: Paul Mampilly, CFA is the Editor & Publisher of Capuchinomics. Paul previously worked at Bankers Trust, Deutsche Bank and ING as portfolio manager/equity analyst between 1991 and 2003. He earned his MBA from Fordham University and his BA from Montclair State University. Paul was awarded the Chartered Financial Analyst (CFA) designation in 1997.

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