Trading and investing is so much easier than we make it.
It should be as simple as this: find a bull market, go long and have an exit strategy in place should conditions change.
So where’s the bull market?
The obvious place is American stocks.
But, you say: ‘the bull market’s looking a bit long in the tooth, QE’s ended, and valuations are looking extreme’. Yup, there’s that wall of worry.
Even so, there’s one US bull market I think we should all be looking at. It’s been going on for some time. But I reckon it’ll be the story as we move into 2015 …
Back in the day – memories of the dotcom bubble
Remember the year 2000?
I’d just bought myself an iMac G3.
I was just making the switch from Netscape Navigator to Internet Explorer. I was still using a dial-up modem (remember them?).
And, yet, I saw myself as one of the grooviest computer kids in town.
My parents didn’t have a home computer yet, nor did my neighbours or my partner. She would just ‘use the one at work if she needed it’.
The internet was so new that you could still get a laugh by adding the words ‘dot com’ to the end of anything you said.
In March of that year, the Nasdaq, the index on which most tech stocks were listed, was trading above 5,000. The intraday high – on 10 March – was actually 5,132.52. It had a price/earnings ratio of 175!
There were only 361 million internet users in 2000. By the end of this year, according to the United Nations (UN), that number will be almost ten times higher – over three billion. That number has grown by over 50% in the last four years alone.
And there are still some four billion people worldwide to come online. In 2000, ten countries accounted for 75% of internet users. Access is now much more widespread.
Already more than six billion of the world’s seven billion people have a mobile phone – more than have a toilet, according to another recent UN study. How long before that mobile phone becomes a smartphone? Three years? Five years? Something like that, I imagine.
Facebook alone (over 500 million) has more users than the entire internet did in 2000. Twitter (282 million) has almost as many.
Whether they’re buyers, sellers, customers, suppliers, creators or users, these people are all contributing to the online economy in some way.
The internet has exploded in size – yet tech stocks haven’t recovered fully
And, yet, the Nasdaq has still not recovered its March 2000 highs. It’s just shy of 4,300. But the companies listed are considerably more real.
Names such as Apple, Microsoft, Google, Gilead, Intel, Facebook and Amazon are all proper stories that generate actual cash flow. Collective profits have trebled since 2008, according to newsletter Atlas Pulse, “while most countries and sectors remain below pre-Great Financial Crisis levels. The forward p/e is 19, which for that level of growth is modest.”
You get a yield now as well, albeit a small one – 1.5%. It was about 0.3% in 2000. The price to sales ratio is about 2.2.
I agree that the valuations of certain social networking sites seem to defy logic, but that’s just one small part of something much bigger. The collective growth from Silicon Valley – as well as the likes of Bangalore, London, and even Nairobi – is very exciting indeed. Whether it’s biotech or bitcoin, tech is the big story of our time.
Why? Here’s one example. A fortnight ago, David Cameron declared that the warning lights are flashing on the global economy. Japan has slipped back into recession. Germany’s growth has stalled.
But generally, growth rates in the developed world have been falling since the 1970s. There is a mixture of reasons for this. Ageing populations and workforces (something Merryn covers in her forthcoming interview with Russell Napier), too many asset bubbles followed by busts, the huge cost of government, high house prices leaving little capital to spend elsewhere, the colossal burden of a global debt load above the $100trn mark – and many more reasons you can think of.
But many of these – particularly the cost of government – do not affect tech in the same way as they do other sectors. Tech is developing new economies that haven’t been regulated yet.
And as the Nasdaq approaches its old highs, there’s another thing that makes me think this bull market has legs.
Tech stocks don’t yet smell bubbly
I’ve commented before on how silver is over-owned. Despite the fact that silver has fallen from 70% from its highs, holdings in exchange-traded funds (ETFs) and elsewhere are at record levels.
The ideal bull market scenario is when few people own the asset in question – not record numbers. It means there are plenty more potential buyers out there.
That, to a degree, is the situation with tech stocks. Of course, loads of private investors own Google and Apple, and argue passionately about the relative merits (or lack thereof) of each.
But as Atlas Pulse says, “Investors still remember the year 2000 and so they steer clear. Today there are few technology funds whereas then, there were many. Flows into the ETFs are negative. Whereas investors have doubled up on gold miners and silver in 2014, they have fled tech. In this regard, investors have been very wrong. Stocks have risen in the absence of retail speculation”.
It’s not just the retail speculators who are absent. The crazy analysts who were hyping any old bit of dross with a dot or a com in its name are more hesitant and understated. They won’t stay like that forever. They’ll get more excited if the bull market goes higher. But for now they’re biting their tongues.
Jim Paulsen of Wells Capital Management was quoted in last week’s MoneyWeek: “Tech is now an animal it has never been before. We still have companies at the leading edge of new ideas, but we also see a host of almost utility-like tech giants that are generating lots of cash, while no longer innovating.”
Tech has solid and real foundations, in a way it didn’t in 2000. But it also has well-funded innovators exploring the frontiers of the space. It’s a compelling mix.
My macro call is that this is is where you’ll see the biggest bull market in the near future. If the Nasdaq can break above its 2000 high, there’ll be a lot of noise – of that you can rest assured.
The simplest way to play it all is to track the Nasdaq, the index most geared to tech, which is something you can do with various exchange-traded funds. The biggest opportunities, as ever, will be in the small caps. But this isn’t as tricky as people make out.
• Bitcoin: the Future of Money? by Dominic Frisby is available directly from the publishers Unbound, or from amazon.co.uk. The audiobook is available here.
Category: Investing in Technology