What stopped the unstoppable?

By Mary Holm

Monday 18th February 2002

Did you hear the one about the Nortel shares? If you bought $1000 of these hi-tech shares a year ago, they would now be worth $49. If you bought $1000 of Budweiser (the beer, not the stock) a year ago, drank all the beer, and traded in the cans for the nickel deposit, you would have $79.

Why bring up this slightly dated American tale? Well, I recently came across an email sent to me exactly two years ago.

It came from a man who runs a New Zealand firm of technology stock advisers.

"The growth in the technology sector is unstoppable," he said.

"Does everyone in your home have a mobile phone, a laptop, auto PC, voice technology? The tech revolution is firmly established. It is not all dot com hype. The future of world progress lies with technology. So you can have profit and fun too."

This wasn't the first time I had heard from him. A few months earlier, he emailed after I wrote the following in an article: "I would stay away from any investment boasting 50 per cent returns, or even 20 per cent. It has to be highly risky."

His response: "If New Zealand investors are to have a bright future, they must be prepared, and indeed encouraged, to invest in opportunities with higher than 20 per cent rewards.

"I would rarely recommend a client invest in a technology stock that was expected to grow at less than 20 per cent per year."

My response: "You worry me. I just hope your clients aren't investing money they can't afford to lose.

".. A stock price that wobbles around a lot is riskier than one with a smoother path. .And hi-tech stocks are among the wobblier ones.

His response: "I suggest you compare the chart of the NZSE40 with the NASDAQ. Tech growth is predictable, whereas the future of the NZSE40 appears bleak."

It might have looked that way then. But I've just made the comparison again.

In the last two years, the NZSE40 has risen 2.6 per cent. It rose more than that last year, but fell the year before.
That's hardly exciting. But it certainly outshines the NASDAQ, which dropped a clunking 58 per cent. Who's bleak now?

More to the point, why am I bringing up all this stuff now? The hi-tech crash is hardly news.

But, as I looked at the man's two-year-old message, I realised there's a lesson in it.

He was right that technological growth is predictable and unstoppable. Each year we do get more heavily into mobile phones, laptops and so on.

Where he went wrong was to equate the growth of an industry with growth in the value of shares in that industry. They are far from the same thing.

Why? Share prices reflect not only what is happening now, but also what is expected to happen.

If it's obvious that an industry will grow fast, many investors will buy shares now. The result: Prices will rise now. They won't wait until the growth happens.

Further down the track, if the growth turns out to be at the expected fast pace, share prices won't change (other things being equal).

Prices will rise further only if the industry grows even faster than predicted.

If the growth is slower than predicted - even if it's still fast - share prices will fall.

That's pretty much what happened in the hi-tech crash.

A couple of years ago investors obviously expected technological growth to rush forward even faster than it actually has.

They bid share prices up and up, to the point where no industry could match the expectations reflected in the share prices. Not even unstoppable technology.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net.

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