Many readers have asked what to do with the tech stocks that have been the cornerstones of their portfolios. Wayne Himelsein, one of my managers, who has been moving out of tech stocks for the past two months, recently recommended buying Amazon. That actually was just part of his plan to slowly reenter Amazon, Apple and Google (Alphabet).
Ken Kam: Technology has taken quite a beating recently, but does that mean “game over”, that from now on, we should all just look elsewhere?
Wayne Himelsein: I wouldn’t quite say “game over”, nor would I ever suggest completely moving out of the companies that have led the market’s rally over the past decade. The reason they did is still as valid today as it ever was. Apple, Google and Amazon, just to name three of the best, have literally ushered humanity into a new way of life. The acceleration of their stock prices have accompanied the acceleration of their widespread adoption, and accordingly, their relentless revenue and earnings growth.
My broadening of the view to look far and wide outside of technology was because technology took a little bit too much of the pie. By definition, if anyone has owned one or more of the darlings of technology for many years, their portfolio is overweight in them as of today. By virtue of them gaining so much more than others. To this end, we should sell some of our hyperextended concentration simply to broaden out our portfolios, and when doing so, it’s always wise to look to the sectors that are hinting at new leadership.
Kam: That makes sense. But why has diversification (or unwinding outsized concentration) become the thing to focus on now?
Himelsein: I think our prior fed chairmen has the all time best meme for answering that “irrational exuberance.” As good as those companies were, and as fast as they were growing, both in fundamentals and in sheer size, the momentum of their stock prices was fierce, and became hyperextended.
Whenever a stock becomes a MUST OWN and people start buying it both to be in it, or simply, just to not miss it, the Bandwagon Effect takes over. The Bandwagon Effect is when the rate of growth of a fad or trend increases as it gets more widely adopted; almost like, the more its had, the faster even more is had!
When this gets out of hand, we get a euphoric run to the clouds, which hits an eventual peak, and soon after, a horrible collapse. Very little has changed at the company levels, it just all went too far too fast, and now it needs a break. A “correction” in stocks is exactly that, it “corrects” itself, letting out some air, so that it can get back on to a more reasonable rate of increase. Nothing can have exponential returns without end, as that would literally run over the human population. Quite obviously, there must be a new human to do a Google Search, and order Amazon Prime on their iPhone.
Kam: I understand. So Tech stocks are taking a breather, but if these are such great companies, when is the time to re-enter, and which ones?
Himelsein: The reality is that nobody knows how much air has to be released before the pressure in the system is back in balance. Some could hypothesize that it has to do with sustainable growth levels, and many could theorize over key price levels and areas of key support. Both camps are well reasoned and have good historical evidence to show for them. But neither can mark the spot.
In other words, whatever fundamental levels are “in line” with historicals or whichever technical levels are most likely, is not necessarily what happens this time. Just like the revenue and earnings multiples were so out of whack on the up, so they may reach on the way down, except the other way. Or much like the momentum generated beautifully sloped trendlines, so may such trendlines arise going downward. There is just no way to know the stopping point of the decline, and “right” time to buy.
Kam: So what is your best advice for re-entering?
Himelsein: As mentioned prior, first look at your whole portfolio and assess the overall technology weighting. If you are overweight, continue looking elsewhere and ignore the buying opportunity. But if you are well diversified, and are definitely wanting, and needing, to build up your technology holdings, first rule, is stay with the best of the best. And within those, start to dollar cost average into their declines, buying piecemeal units of your end goal for size of each name, and across a few names. Sure, get the three AAA’s — Apple, Alphabet (Google), and Amazon — but do so in a methodically sized and spaced process , such as 15% of each every 2 weeks for the next many months.
This way, if the descent continues, you’re buying in lower and lower, and if it rebounds, you won’t have missed out. The take-away point is that there is no certainty to the ends of market corrections, so the only way to create certainty is through your own structured process, and especially by a middle ground ground approach like Dollar Cost Averaging, which guarantees a decision that will not be totally wrong.
My Take: Apple, Alphabet, and Amazon have all posted substantial losses recently. If you didn’t own these stocks over the past 5 years, you probably regret it. This is a chance for a do over. These stocks still have the best growth prospects and now you can can own them without paying such a high premium for growth.
If paying a lower price for growth makes you uncomfortable, then Wayne’s recommendation to make small purchases over the next several months makes a lot of sense. It is better to make a lot of small steps in the right direction than to do nothing until you are “sure” the time is right to make a big buy.
Wayne’s Logica Focus Fund (LFF) has a 18+ year track record at Marketocracy. Over that period, Wayne’s model averaged 11.87% a year which compares well to the SP 500’s 5.45% return for the same period.