The Tech Stock Investor

Not long ago Alan Greenspan uttered the famous phrase containing these two words: “irrational exuberance”. Not since Concord and Lexington has such a small event triggered so much turmoil and confusion. Those two words alone just prove that a lot of people can be swayed by one man saying very little. So when a few men start saying a lot, the world should beware. This can lead to crowd madness.

The madness of crowds led to the crash of ‘29. It has also led to a few other noteworthy crashes in the preceding decades. The stock market can be as cold a mistress as the sea. She can toss a lonely investor about like so much chaff in the wind and leave him broken on the rocks. In my own personal experience, and in the experiences of a lot of folks I would imagine, most investors who “get broken on the rocks” get broken due to their own negligence and failure to research and read. “Readin’, Ritin’, and Rythmatic” have been replaced by “Readin’, Researchin’, and Readin’ some more”.

Reading and research are an investors best weapons in the battle for stock market profits and victories. Yet time and again I hear friends, family, and co-workers complain about losing money in the market. Then, of course, someone spouts that old saw about “someone always loses and someone always wins” in every market transaction. This is pure ‘bunk’, I say.

If I buy a stock at $30 a share and sell to someone at $32, who, in turn, sells at $33, then where was the loser in this transaction? Heck, even the broker wins in this one, getting transaction fees on both ends. This probably happens more often than most folks think. I have heard for years about the “loser and winner” in every transaction, and I just could never really bring myself to believe it. Hell, why would anyone stay invested in a crap shoot like that? No one would. Not saying there aren’t a few die hards with money to burn who think they can out gamble that cold mistress, because there are a lot of them, but I could not, can not, and will not, believe that every transaction leaves one investor richer and one poorer.

Anyway, rational or irrational, exuberance probably has no place in the market, or anywhere else for that matter. Exuberance is an emotion. Emotion has no place in your investing strategy. So when Greenspan made that statement, I think he was telling a lot of folks to get with the program and to get out of the crap shoot mentality. I agree. We need a lot more figureheads like that making statements just like that.

In the late 1960’s, Eugene Fama, a Professor at the University of Chicago Graduate School of Business, developed the Efficient Market Hypothesis. For the uninitiated, the Efficient Market Hypothesis (EMH) was built around the concept that all trade-able equity prices have already reflected all known news and information about the equity and the future prospects of it. It also asserts that it is impossible for anyone to consistently outperform the market by using information that the market already knows.

I think Professor Fama was on to a good thing with this hypothesis at the time he formulated it. I think that several dangerous assumptions were made with this hypothesis however. The first and most important, being that it assumes that all investors are privy to all information about a stock at the same period. In the late 1960’s, this may have been true. The number of active traders , institutional investors, and private investors was significantly lower than it is today, so the chances that a majority of investors were aware of all the news about a security, or at least a significant portion of it, was a very plausible assumption.

In today’s investing market, this assumption is madness. I can only fathom that stocks like Microsoft, McDonald’s, and Wal-mart would reflect this assertion. Those are highly publicized companies with huge public relations expenditures to make those companies household names. The media scrutinizes every move they make and analysts sift through their statements like hot knives through butter.

Let’s look at a lesser known stock: ACE*COMM Corporation (ACEC). ACEC was flirting with $25 a share in the late 90’s, but has yet to see $5.00 a share since late 2000. It is now at $1.25 a share and could be considered a penny stock by many measurements. Is this EMH in action or just a stock pushed up by the dot.com bubble? I think the latter is the cause more than anything and is further proof that EMH has finally died as a viable theory.

The news media and internet convergence coupled with the fact that there about a thousand times more investors in the market than in the 60’s has definitely fueled the demise of the Efficient Market Hypothesis. No one can possibly know everything about every stock in the market, and everyday new people learn about new stocks which thousands more already know about. Can we consistently beat the market and make a good return in the market? I think the answer is not just yes, but heck yes!

Tech Stock Investing Will Make You Rich! Sounds good doesn’t it? Invest your money in a tech stock, wait for the shooting star to hit the moon, sell your investment, and collect your retirement fund. If only it were so simple. So many investors these days are looking for the next Microsoft, eBay, or even Google, that many are overlooking solid investments in technology companies with great potential.

It has often been said that investing is not a place to get rich quick. Not that people haven’t gotten rich once or twice mind you, it is just not very often, and chances are you probably don’t know anyone who has (or even will be). So why do investors keep coming back to the market looking for the quick score? Greed, plain and simple.

Those same people didn’t believe their parents when they told them to eat that broccoli and they are even less likely to believe anyone else’s good advice, even when it slaps them in the face. You work hard for that money so do not let it slip through your fingers due to a momentary lack of reason. Greedy investors are careless investors and careless investors are future soup line attendees.

The above paragraphs are not to suggest that having hopes and dreams are a bad thing or that trying to make a lot of money in the market is a bad thing. Let’s just temper our enthusiasm with a little caution so we can spend some time in Tijuana when we get old and grumpy. A pocket full of cash is a lot better than a pocketful of dreams that have crumbled. Flying into the face and straight up the nose of conventional wisdom is not my idea of a get rich quick scheme, so lets all have a little Cup of Caution with our investing decisions.