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September 3, 2004

Good bye Technology!

I made up my mind this week after working on the idea for a little over a year. I'm going to permanently rotate my portfolio out of technology because it no longer fits my investment needs. There are three things you need to know about me to understand my decision. First, I love technology and I have been involved with technology for most of my life. Second, I'm 65 going on 66 as the kids like to say. And third, being retired I don't have a source of income and I don't plan to go back to work. The choice is about reducing the level of risk. There is a fourth item that you might as well know, I made a large amount of money in the techno-bubble but, unfortunately, it's all gone. With a lot smaller capital base and no income, I need to reduce the riskiness of my portfolio.

Over the last year I have been rotating out of technology. Most of the stocks I sold have gone down in price considerably after I sold them. The only selling mistake was Qualcomm.

Ticker   Sell   Current      Loss
ALTR    22.51     19.06     15.3%
AMZN    48.53     39.18     19.3%
ARMHY    5.72      4.31     24.7%
AVNX     5.17      2.34     54.7%
CGFW     7.88      7.11      9.8%
LENS     7.95      1.74     78.1%
LEXR    16.31      6.21     61.9%
PMCS    20.95      9.33     55.5%
RFMD    10.52      5.44     48.3%
NTE     29.52     19.48     34.0%
OPSW     7.90      6.61     16.3%
PRSF    15.65      3.42     78.1%
RETK     6.65      3.92     41.1%
SNIC    18.86     15.07     20.1%
XLNX    38.39     27.25     29.0%

Ticker   Sell   Current      Gain
CHKP    17.41     18.07      3.8%
QCOM    21.61     38.82     79.6%
SNDK    22.99     23.10      0.5%

One would think that the excesses of the bubble had already been worked out of the system but from these price drops it would seem that there is still a lot of blood letting to be done.

On the other hand, the non-tech stocks that I bought have done mostly very well:

Ticker    Buy   Current      Gain
AMGN    54.31     59.91     10.3%
ARO     22.20     30.30     37.5%
DKS     24.58     33.23     35.2%
URBN    17.235    31.49     82.7%

Ticker    Buy   Current      Loss
ROST    30.83     23.53     23.7%
RYAAY   31.65     31.27      1.2%

There is no perfect method of predicting the future. If there were, there would be no market, there would be no need for a market. The problem with technology is that it is too much of a crap shot. I'm officially declaring myself incapable of determining where and how to invest in technology.

I enjoyed reading One Up On Wall Street by Peter Lynch but I figured that since I understood technology, there was no harm in my investing in technology. The years 1998-99 seemed to bear this out. My broker would call me for advice about buying technology issues! That was how I found George Gilder. My broker sent me a copy of Gilder's book Microcosm and he asked me to "translate" the GilderSpeak for him! Then he started to send me copies of the Gilder Technology Review (GTR) and I was hooked. In the 14 months between January 1999 and February 2000 I more than tripled my portfolio. I was absolutely brilliant. People told me so and I believed it! The proof was in the pudding! What no one told us was that anyone throwing darts at a technology chart would probably have done just as well. It's the bubble, stupid!

Poorer but (I hope) wiser, now I'm going to follow Peter Lynch's advice. As a matter of fact, that's how I selected the retail stores this past year. Three out of four is pretty darn good. Credit must also go to The Motley Fool who brought them to my attention in the first place.

The stock market mantra is: "Buy cheap and sell dear." The problem is to determine when a stock is cheap enough to buy and when it is dear enough to sell. Ben Graham set out to solve that problem and he never did because he was looking for stocks that were cheap in the absolute sense, strictly from the point of view of fundamental analysis. What has to be determined is if the market thinks the stock is cheap because then the market will bid the price up. If you find a stock that is fundamentally cheap and the market does not know about it, or if the market does not think it is cheap, the market will not bid its price up. There will be no demand for this unknown or unappreciated cheap stock. If you buy a stock that is fundamentally cheap and then wait until the market catches on, most probably the time value of money will eat any benefit you might have from the stock's eventual appreciation.

A lot of people think that value is something intrinsic to an object. They might say "gold is valuable." But so is a horse when needed: A horse! a horse! my kingdom for a horse! King Richard III. Value is determined exclusively by supply and demand. Value, like beauty, is in the eye of the beholder. If using GAAP or pro forma figures you determine that some ratio or other is below the norm, that does not make the stock cheap or expensive. When the herd "finds" a cheap stock then it becomes valuable to have because the herd will, most likely, bid the price up.

Chartists have the right idea but not the solution because they never found the truly meaningful pattern in the charts. The charting methods commonly used have some predictive value because they become self fulfilling prophecies but chartists have not been able to tell us when the herd thinks a stock is cheap enough to buy or dear enough to sell. It fell to a fellow Fool, BuildMWell, to find this pattern. BuildMWell created the BMW Method and now has a board where fellow Fools can talk about it.

The BMW Method is very simple, it uses a chart to find at which price point in the past the herd became interested in bidding up the price of a particular equity and projects this price point into the future. Since companies don't stay the same size over time and since their intrinsic value also changes, the price point determined by the BMW Method also moves, up or down, with time and with the performance of the company and its stock.

But reader beware, finding companies with appropriate charts is just the starting point. Then comes the more traditional fundamental due diligence. Don't say I didn't warn you!

I invite you to visit The BMW Method board at:

http://boards.fool.com/Messages.asp?bid=116681

I will no longer look for companies that want to rule the world. Now I'll look for companies that investors want to buy.

Denny Schlesinger
Caracas - Venezuela


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