Buy and hold the blue-chip tech names and you can’t go wrong. Doesn’t that summarize everything your broker has told you in the past five years? Isn’t that what your mutual-fund manager says in his note to you every quarter? Isn’t that what the talking heads and the magazines and the columnists all say? How could they all be wrong?
Perhaps they have never heard of “the cycle.” Maybe they don’t realize that there are times when the tech business turns bad just because it is, after all, a cyclical business. And when the cycle turns down, there’s no such thing as a tech blue chip. There are just plenty of white chips, the kind you leave at the table for tips because they aren’t worth changing back to dollars.
When I first started buying stocks with other peoples’ money nineteen years ago, I had never thought of technology stocks as cyclical stocks. I thought that the only thing that mattered was management. If management was good, I wanted to be long. If management stank, I wanted to be short. Didn’t much care about anything else. Didn’t think there was anything else.
And then, in 1984, the Japanese came in and flooded the world tech market with product that overwhelmed demand for all of the wares of our major tech companies. Suddenly, companies that I thought had clear growth paths for years to come began to blow up left and right. It didn’t matter if the tech companies were managed by geniuses or fools. They all got slaughtered. Only a careful market hedge, a bet against all equities, kept me in the game. A whole bunch of folk got carried away with tech back then, and they were never heard from again.
The same thing happened to me in 1987. I had fallen in love with Texas Instruments and Intel. How could you not? Smart guys at the helm of both. Smartest guys in the world. At the time, they made commodity chips better than anyone. But the Japanese flooded the market again. These fantastic American companies got clobbered as the industry turned out to be cyclical once more. They were just as hostage as ever to supply concerns, and there was just plain too much supply.
So in 1995, when the cycle turned down again because of massive oversupply, I stepped aside. I sold tech. Even the great techs. I wasn’t going to ride these semiconductor stocks and their brethren down into oblivion. Again, I got out before suffering brutal losses that might have been too hard to sustain for this hedge-fund manager. And then, in 1996, something amazing happened. Simultaneously, wireless became affordable to all and the Web exploded into being. These were two huge trends that temporarily removed the cyclicality of tech stocks. They stimulated abnormal demand for everything from PCs, used to surf the Web, to cell phones and handheld devices, which made it easier to stay in touch with the office and with friends.
The ingrained nature of buying and holding makes selling these stocks anathema to most holders. But I was taught you can’t hold through a down tech cycle. It’s just too brutal; the selling is too punishing.
At the same time, many new folk plunged into the market. To them, cyclicals, if they knew them at all, meant aluminum, steel, and paper companies. Technology cyclicality seemed like an oxymoron. The growth in tech was, as we call it, “secular,” meaning: nothing but up, up, and more up, with no concern for supply or demand.
We became convinced, collectively, that a whole category of companies was blue-chip tech, meaning that the sky was the limit on the growth of such stocks. We laughed at those who invested only in what was in their medicine chest or their fridge. We even began to scorn Warren Buffett for his attention to Old Economy blue chips. What a fuddy-duddy! Get with the program, Warren!
This year, however, supply caught up with demand. The world produced too many memory chips, too many microprocessors, too many PCs, and, yes, too many cell phones. These had never been in supply-demand imbalance all at once. In fact, there had never been such a thing as a cell-phone glut.
I know because I got carried away, too. While I understood the cyclicality of memory chips and PCs, I didn’t want to believe there could ever be too many cell phones. It was only after my TheStreet.com columnist Herb Greenberg repeatedly and publicly bashed my too-bullish view on the group – and my fund took some lumps on Ericsson and Motorola – that we managed to escape with sizable but manageable losses.
So all of those companies that make parts for cell phones and computers and mechanical whizbang contraptions that come under the rubric of tech got hammered because the cycle had turned down. Collectively, hundreds of these companies have now failed to meet revenue and earnings expectations and have fallen by the wayside. They litter the 52-week-low list and bounce only occasionally, if at all.
Now individuals are swimming in technology stocks, and the undertow can’t be fathomed. Brokers plied too much tech. Mutual funds bought too much tech. And the day traders bought so much tech that they are in way over their heads. Heck, many of them have drowned already. Too late for mouth- to-mouth resuscitation for those thinly capitalized swimmers.
Of course, the ingrained nature of buying and holding makes selling these stocks an anathema to most holders. But I was taught that you can’t hold through a down tech cycle. The action is just too brutal, the selling too punishing.
Oddly, if you don’t believe in the cyclical nature of technology stocks, or if you believe that if you wait long enough the cycle will swing back, you may be okay at this point. Maybe the nasdaq’s unceremonious halving, which we just completed, serves as the bottom to the cycle.
In particular, it is possible that the companies involved in networking and storage of commercial data may have seen only a slowdown in growth, not an actual downturn. That’s why we hang on to our Cisco. And we think that the handheld plays, the Palms and the Handsprings, might still get a boost from holiday buying.
But these are the lonely lifeboats in a rough sea. We are only a few months into the downturn. We haven’t seen the classic signs of corporate capitulation, the bankruptcies, the factory idlings and the layoffs, and the charges, that have marked past bottoms. Until we see them, we are using any strength to sell our remaining tech cyclicals.
Our partners don’t care whether we call them blue chips or cyclicals. They just don’t want losses on either variety. It’s funny, but when it is someone else’s money, the rationalizations don’t get much of a hearing. If they did, I guess I would own techs through thick and thin, too. It is a lot easier to buy and hold than it is to divine when the cycle has peaked and take those great profits before they become losses.
Unfortunately, I can’t be that complacent. I know what happens if you get that buy-and-hold bug through a down tech cycle. They take the money away.
Check out TheStreet.com’s “10 Questions” this week. Paul Meeks, manager of the Merrill Lynch Internet Strategies fund, is on the hot seat. Available free at www.thestreet.com.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund has long positions in Cisco Systems and TheStreet.com. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer’s writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at firstname.lastname@example.org.