Good-bye, Mr. Chips

In the late nineties, we began to ascribe mythical powers to technology stocks. They outperformed all other stocks regardless of how strong or weak the economies of this or any other country were. They had more growth than food, beverage, or even drug stocks. They became “core holdings,” in the way our parents’ generation viewed Delmarva Power or Niagara Mohawk. They were the superstocks that we had to own. No matter what.

In the twenty-first century, we are discovering otherwise. First, Dell Computer, the stock that made Dellionaires out of ordinary folk, vanished from its seemingly permanent slot on the 52-week-high list and instead became a fixture in the 52-week-low column. Then Cisco, that backbone of the Internet, ceased making new highs. The top valued networker now sits mired in the 50s and low 60s, inexorably pulled back to the low end of the range each time it tries to break out for uncharted territory. We lost Microsoft too, somewhere between the company’s intransigence in the face of the Justice Department and the abysmal showing of Windows 2000. That former cash cow of a product now looks like one of those starved animals strolling through Calcutta. It doesn’t have the beef. And with sales flagging, Microsoft has spent more time at the low end of its trading range than it ever has since it became public.

But there was always Intel. We came to believe that the company that created its own destiny, that was paranoid enough to survive, that cannibalized its own to stay on top, would always deliver for us. Even after Dell and Cisco and Microsoft faltered, Intel kept rising right on through what’s becoming an increasingly sorrowful year. In Intel we trusted, and Intel kept our faith in real technology from wavering. Those other guys? They just hadn’t gotten it right, that’s all.

Until now.

After a stunning and totally out-of-the-blue announcement less than two weeks ago, Intel blew up. Just associating the term blow up, nomenclature typically reserved for companies that can’t get out of their own way, with Intel sends a shudder through me. Bad things are not supposed to happen to good stocks like Intel. They’re supposed to happen to highfliers, those nosebleed speculative plays indulged in by gullible tip-buyers who really should know better. Bad things are supposed to happen to the fraudulent dot-coms that took all of our money and headed to financial Brazil. We were supposed to be safe in Intel. Forever.

Now Intel crouches in the 40s, cut nearly in half from where it was a few weeks ago. Yet we still don’t want to give up. We are in total denial. People want to know only one thing: “Should I buy more?” Actually, they want to know more than one thing: “With the price so low, should I sell everything and buy more Intel?” Or, “How can I go wrong taking all of my kids’ money and putting it in Intel?”

I am still an Intel-aholic. It’s an incurable condition. And I am confident that by this time next year, our baby could return to the highs it saw five weeks ago.

To which I say, go ahead, be my guest, but perhaps, just possibly, there is a pattern here. Maybe technology stocks are not the pure growth stocks we thought they were. Maybe there are other stocks – good, high-quality stocks in a host of other industries – that are safer, more durable, and less financially threatening.

Maybe we own enough tech already. Oh, I can see the anger and worry in your faces with that line. Tech – that’s the Holy Grail! That’s what made us great. You can buy tech and forget about it. Tech will always go higher because, well, tech has always gone higher.

To which I say, wrong! Anybody who lived through the 1984 downturn in tech stocks can recall a time when it paid not to put more money in tech. For years, technology punished funds that overindulged in its fields of plenty. I remember it well, having sunk almost 100 percent of my assets into a Fidelity Technology fund in the early eighties whose value only recently exceeded my entry point!

Sure, times are different now. Technology has become more deeply ingrained worldwide. We have come to expect that technology leads markets, and technology stocks have soared to almost 30 percent of the stock-market pie. But that percentage, I would say, is just too high for the sector’s own good.

Before you snicker because you know that intel inside is recognizable from here to Kathmandu or that people in Asia would rather go without shampoo or toothpaste than skip a new Pentium cycle, consider this: I am a card-carrying, certifiable Intel-aholic. I have preached this stock’s gospel to everybody for almost fifteen years. In my swan-song piece for Smart Money, written after four years of doing nothing but raving about Intel – during which time the stock quadrupled – I recommended that readers double-down on their Intel position as soon as possible, and the lucky ones who did caught still one more quadruple!

But I know something else about stocks. They come in cycles, and whenever one group of stocks grows too big, things begin to go wrong in strange and weird ways. In the early eighties, oil and oil services grew to be so popular that the sector came to dominate all others. Oil promptly crashed to new lows.

In the mid-eighties, the foods and tobaccos and beverages became the mainstay of all large portfolios. But severe overvaluation set in at the time of the great leveraged-buyout craze, and many of these companies shrunk to values from which they are just beginning to climb back ten years later. The drugs became the place to hide after the stock-market crash of 1987, until President Clinton, midway through his first term, promised that the days of unfettered drug-price increases were over.

Since then, we’ve rushed headlong into tech, and most funds that sidestepped the move have underperformed or failed to attract new assets. But if the pace of this year continues, those funds that are overweighted in the four horsemen – Dell, Intel, Microsoft, and Cisco – will no longer be riding high, and an inexorable decline in the sector will begin.

I wish it weren’t so. My own fund has excelled in picking tech stocks for a decade, but it is our exposure in and knowledge of aerospace and banks and oils that is allowing us to excel in a year when the averages can’t rally and big-name tech is in decline. We watch the public fund flows, and we know the funds that are overweighted in classic tech will find themselves short of the cash they need to power their new favorites higher.

Meanwhile, other funds, the ones with exposure to non-classic tech, will begin to be featured in that great promotional machine, the Business Television and Magazine Juggernaut. They will begin to get the marginal assets, allowing their stocks to be taken up even further. And a new favorite trend will be born.

Does it have to end this way? Can Intel and Microsoft and Dell and Cisco reverse themselves, allowing their managers to keep up the good fight? Sure, but that’s not the way stock history tends to shake out. We are heading into the tax-loss selling season, and people who bought these stocks at inflated prices earlier in the year will begin to put downward pressure on these stocks in the fourth quarter as they struggle to keep their capital-gains taxes down. The longer these classic tech stocks founder, the more likely their owners will put them down.

And what if you don’t care about what happens to stocks this month, or this quarter, or even over the next year or two? They could come back. I never sold my Fidelity Technology Fund, and it came back many, many years later. But at a considerable opportunity cost.

I am still an Intel-aholic. It’s an incurable condition. And I am confident that by this time next year, our baby could return to the highs it saw five weeks ago.

By then, I’m pretty sure I will have fallen off the wagon. But that’s me. I can’t help myself. Until that happens, abstinence may be the key to my financial future. I’m just taking it one day at a time.
This Tuesday, don’t miss’s third-quarter mutual-fund roundup, which reviews the top-performing funds of the quarter. Available free at

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had positions in Microsoft and Cisco. 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

Good-bye, Mr. Chips