Don't Join The 90% Club

By David McEwen

Monday 9th April 2001

Are you a member of the 90% club? This rapidly growing group is formed by people who bought a technology share are its peak and have seen it lose 90% or more of its value.

The New Zealand share market was fortunate enough to miss out on much of the speculative 'new economy' bubble that afflicted so many other markets, which is why it is so steady now when others are plummeting.

By comparison, the US Nasdaq trading system, where many technology shares are listed, has delivered losses to investors in the past year of around $25 trillion dollars.

However, this country was not entirely immune to the frenzy and a relatively small number of companies found their way to the Stock Exchange. In some cases, these companies had few assets, little or no profits and no coherent business plans.

With the benefit of hindsight, the popularity of such flimsy outfits is astonishing.

Although investors in the technology sector have been badly burnt, there is still reason to invest in such shares. Now may not be a bad time to look around, when so many others are selling.

There is no denying that the technological revolution will continue to have a major impact on our lives. As we have learned from the industrial revolution a century or more ago, rapid development brings with it opportunity and great wealth. There are many failures along the way but those companies that survive tend to win big time.

Therefore, I suggest it is time members of the 90% club jump back on the technology horse and try again. But don't buy any old thing with an 'e' in front of it. Here are a few tips for achieving better results next time.

(a) Look for a point of difference. A couple of years ago, companies that built web sites for other companies were the hottest investments around. Since then competition has increased and demand has declined. It's much better to look for companies that supply unique content or services - the so-called 'killer application'.

(b) Seek maximum potential. If a company has a winning product or service, the beauty of the Internet is that millions of customers can find out about it very quickly. Invest in companies that have something that is likely to appeal to the largest number of people.

(c) Forget the 'burn rate'. Not long ago, the more a company spent (or the rate at which it burned through its venture capital) the more investors valued it. The theory was that by capturing market share at any cost now, the company would be able to charge what it liked later.

However, the decidedly old-economy notion, that a company which spends more than it earns ends up broke, has been found to apply in the new economy. Only invest in companies that make money.

(d) Limit your losses. Considering the volatility and high-risk nature of technology shares, investors have to be prepared to cut their losses when things go wrong. Whenever a share breaches a set limit, say 20% below its purchase price, investors should sell out and limit their loss. It is far better to suffer a small loss than hold on and risk re-joining the 90% club.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz or by mail care of this newspaper.

Comments from our readers

No comments yet