One last bit of investing advice
As I head out the door of USA TODAY, one last bit of advice
In his last column for USA TODAY, Waggoner offers a cautionary tale.
I’ve always avoided writing in the first person, in part because I first started this column in the late Cretaceous period. Back then, business writers used a tone that sounded like Thurston Howell III telling Gilligan never to dip into principal. It seemed pompous.
And, while I know it’s trendy to share, I could never understand why anyone seeking information about personal finance would want to know about my fondness for lemurs. I’m basically a shy woodland creature.
But today I wanted to tell you a story about my biggest investment mistake, and the lessons that can be gleaned from it — as well as one of the best investments I’ve made.
Here’s the story. After technology stocks peaked in March 2000, I watched with morbid fascination as the Nasdaq 100 ETF, which trades under the ticker QQQ, plunged like a Sumo wrestler from a high dive. Technically, QQQ is an exchangetraded index fund that tracks the 100 largest non-financial stocks on the Nasdaq stock exchange. But basically, it’s a big basket of tech stocks.
Technology had gotten crushed since the Nasdaq peaked on March 9, 2000 — and rightfully so, given the epic size of the bubble. But when QQQ caught my eye, the three largest compo- nents were Microsoft, down 42% at the time, Intel, down 56%, and Cisco, down 79%. These were not dotcom losers like Pets .com, I reasoned. They are all real companies, and should eventually recover. I had some money that I wasn’t saving for a new kidney, so I bought 100 shares. What the heck, I figured. What’s the worst thing that could happen?
I made that purchase on Sept. 10, 2001.
In the vast scheme of the terrible things that happened on Sept. 11, 2001, my 100 shares of QQQ is nothing. Nevertheless, I was swiftly reminded of the first rule of investing: Things can always get worse. You can’t have rewards without risk.
Rather than roaring back in an in-your-face display of American might, the stock market swooned when it reopened after the at- tacks. I had purchased the shares for $34.10. By Sept. 28, I was sitting on a 22% loss. This brings us a corollary of the first rule: Just because a stock has fallen a great deal doesn’t mean it can’t fall a great deal more.
But these are trading rules more than investing rules. If you’re trying to find value, it’s not enough to buy low. You want to find stocks that are cheap relative to earnings, if not other value measures. Microsoft, while down enormously since its peak, was still selling for about 43 times earnings in 2001. Intel was 33 times earnings. High, but growth is always expensive, I reasoned.
Which brings us to another rule: Nothing ’s eternal on Wall Street. Growth investing ruled from 1982 through 2000. But bargain-hunting came back into vogue after the tech wreck. No one wanted a stock with a P-E over 15 after 2000.
In the wake of the meltdown,
tech stocks got even more expensive because earnings slumped. Not only was the economy slowing, but many companies had shot their tech budget in 2000, preparing for a world that did not end because of the Y2K bug. And companies were in no mood to spend on IT in the middle of an epic bear market.
I held on, assuming that sooner or later, a rising economy would lift the stricken tech sector. And I was absolutely, completely right. But it happened in 2006. QQQ stayed in the $20 range for most of 2002 and 2003, finally passing my purchase price in 2004 and breaking $40, briefly, in January 2006. I finally threw in the towel at about $40 in 2006.
All of this brings us to three more observations:
There’s a point at which “being early” becomes “being wrong.” Many of the technology predictions of the tech bubble came true: The Internet was, in fact, an enormous game-changer. It’s just that these things happened much later than people thought, and investors paid too much for the wrong companies. All those people who have been predicting rampant inflation the past decade? They’re not early. They’re wrong.
Hope is not a great investment strategy. Even if Microsoft and Intel were old tech, I hoped that American technological superiority would eventually pro- duce a winner. It did, in the form of Google and other new tech giants. But it took far longer than many thought.
Buy- and-hold in volatile areas like technology or emerging markets is a lot easier in theory than in practice. One money manager told me, long after my QQQ debacle, that there are very few long-term technology investments. Most are trades, because technology becomes obsolete so quickly. Digital Equipment gives way to Lucent, which gives way to Google. And if you have other things to do in your life — like being a daily reporter — you probably don’t have the time or attention span to monitor trades.
In the past three years, of course, QQQ has rocketed, with some justification. Americans really are good at technology. But QQQ’s good years don’t entirely make up for the many dead years. On an annualized basis, QQQ has gained about 9.6% since Sept. 10, 2001. The Standard and Poor’s 500 index has gained 16.4%. I would have been better off in a broad S&P 500 index fund the whole time.
There’s value in making the occasional speculative investment, provided you don’t need the money for a new iron lung. And, of course, you have to take those lessons to heart — especially the ones you learn from your mistakes. Anyone can make a good investment and think he’s a genius. But it’s the bad ones that teach you the most, if you’re open to learning.
The best investments for most people are widely diversified, lowcost funds that you throw money into on a regular basis. As long as you resist the urge to time the market, and as long as you have enough time in the market, everything should be fine.
Which brings me to one of my best investments: working as a columnist and reporter at USA TODAY for a quarter of a century. My long-suffering editors have let me make bad jokes and write far too much about bonds. And I’ve worked with some wonderful friends, who are also some of the best writers in the business.
My real pleasure, though, has been writing for USA TODAY’s readers, a tough and sophisticated audience, but also a kind and appreciative one.
It has been an honor.