The tallest tree in the world is a redwood in California.
It’s called Hyperion.
And it’s 379 feet tall. That’s taller than the Statue of Liberty, which stands at 305 feet.
That’s impressive. Nobody expects Hyperion to grow to 379 miles tall. That would be ridiculous.
But you can bank on stock market investors to forget this simple truth – nothing goes in one direction forever.
And when stocks they own pull back… even if it’s not a significant loss relative to the gains they’ve been making… investors often panic and sell.
Take the pullback in tech stocks that’s been dominating the headlines in the mainstream financial press lately.
One of our regular stand-ins for the tech sector, the Nasdaq-100 Index, is down 8% this month.
It’s wiped $1.5 trillion off the Nasdaq-100’s total market value. It’s also put many tech investors on edge.
But as you’ll see today, the worst thing you can do is panic and sell after a pullback like this. If you’re in the right tech stocks, history shows these pullbacks are opportunities to buy, not sell.
The Daily Cut is where you’ll find the latest ideas from Teeka Tiwari, Jeff Brown, Dave Forest, Nick Giambruno, Tom Dyson, Dan Denning, Jason Bodner, Bill Bonner, and Doug Casey.
Together, they make up the Legacy Research team.
As your editor, I (Chris Lowe) make sure you’re plugged into the most profitable opportunities they put on their readers’ radars.
And some of the biggest opportunities we track for you and your fellow readers are in disruptive new technologies. It’s why we’ve spilled so much digital ink on 5G, blockchain and cryptocurrencies, self-driving cars and trucks, artificial intelligence, gene editing, and quantum computing.
You see, in 2015, we invited Silicon Valley insider and tech-startup investor Jeff Brown to join the Legacy team.
Since then, we’ve launched three tech-investing advisories with Jeff – The Near Future Report, Exponential Tech Investor, and Early Stage Trader – to track these trends… and more.
And he’s given his paid-up subscribers the chance to close out tech stock recommendations with gains of 239%… 259%… even 277%.
And rest assured, we continue see a bright future for tech thanks to exponential growth in tech innovation.
Nope.
First, we’re nowhere near the kind of nosebleed valuations we saw at the peak of the dot-com bubble at the end of the 1990s.
Since March 2020, the Nasdaq’s price-to-earnings (P/E) ratio jumped to 30 from 18.
In other words, in March, investors were willing to pay $18 for every $1 of earnings the companies listed on the Nasdaq produced. Now, they’re willing to pay $30 for the same $1 of earnings.
That’s a startling 66% jump.
But in the year 2000, at the peak of the last tech bubble, the Nasdaq’s P/E ratio hit 60. That’s double today’s levels.
Second, investing in bleeding-edge tech stocks with massive growth potential will feel like a roller coaster much of the time. It should come as no surprise that there are dizzying ascents… and nauseating plunges.
And just like with a roller coaster, the reason tech stocks plunge so hard is they first experienced a massive surge.
It’s an on online discount furniture store. And investors can’t get enough…
After soaring 4,516% between March 16 and August 20, Overstock.com plummeted 45%.
Or take Tesla (TSLA)… The world’s most high-tech automaker shot up 590% from its March lows to the end of August. It has since fallen by as much as 34%, and is still down 17% on the month.
Or Zoom (ZM)… The video conferencing company has seen a boom in new users since the pandemic began. And its stock soared 326% from March to August.
But it has since dropped by as much as 23%. And it’s down 12% this month.
And if you’re tuning in to the mainstream media… it might seem like tech stocks are a bad place for your money.
But the following two things can be true at the same time: Today’s best-in-breed tech companies could be the most successful stocks in the world over the next few decades. Along the way, they’ll plunge several times… even crash spectacularly.
This is just the way some tech stocks trade. They’re so successful, investors have a hard time reining in their exuberance. This causes big price rises… followed by big price falls.
But if you want truly life-changing profits… the key is to sit tight and do nothing as share prices gyrate.
Take the world’s most valuable public company, Apple (AAPL).
Apple’s “market cap” (the sum of all its outstanding shares) is higher than the combined market cap of the top 100 companies listed on the London Stock Exchange.
Apple has had a remarkable run since it went public. Its stock is up over 220,000% since the early 1980s. That’s a 22.4% annualized return.
But there were major bumps along the way. Over that time, Apple’s stock has fallen by more than 75% on three occasions. And it’s been cut in half eight times.
Or take Netflix (NFLX). Since it went public in 2002, the streaming giant is up 40,100%. That’s a 39% annualized return.
But NFLX investors have experienced two different 75% drops and many drops of 25% or more.
Nvidia (NVDA) is another example of how eye-popping returns don’t come in a straight line.
Since its IPO (initial public offering) in January 1999, the specialized chipmaker’s share price has shot up by 31,220%. That’s a 30% annualized return.
But NVDA hasn’t been immune to sharp drawdowns. It has seen four different periods of dropping more than 75%.
So the next time you hear one of TV’s talking heads wring their hands over the pullback in tech stocks… remember this history.
Price falls like we’ve seen in tech this month are par for the course. If anything, you should use them as opportunities to buy more of your favorite stocks.
And look out for tomorrow’s dispatch… We’ll look at a new breed of traders that’s largely responsible for a lot of the recent volatility in technology stocks.
Regards,
 |
Chris Lowe
September 14, 2020
Bray, Ireland