Heeding the Siren Song of Technology Stocks
Meet the driving force of the massive shift to “new-economy” stocks: It’s your neighbors, your co-workers, your relatives . . . and how about your own portfolio?
Individual investors have provided much of the money that has powered new-economy shares--mainly technology issues--for the last several years. Although demand for many of those stocks exploded in the first quarter, the trend had been building for much of the 1990s.
Which is precisely why many individual investors say that, despite the slump in the tech sector in recent weeks, their confidence in leading stocks isn’t severely shaken. They see no reason to question the long-term growth prospects of technology in a world that is increasingly demanding more of it--from the Internet to computer chips to wireless phones.
“I think the economy is changing and technology is driving it,’ said Susan Brainin-Martin, president of a Los Angeles consulting company, echoing the sentiments of many individual investors.
Certainly, short-term “momentum”-oriented investors were a big reason tech stocks zoomed in the first quarter, and even long-term investors may have found it hard not to get caught up in the mania. “Got to have that ‘dot-com’ stuff!” quipped Ingelis Jensen, co-founder of the Professional Women’s Investment Club in the San Fernando Valley.
But perhaps more typical of heavy tech stock owners is Sam Tennant, a 72-year-old retiree from Rancho Palos Verdes.
He had traditionally invested through mutual funds because he felt he didn’t have the time to investigate dozens of individual stocks. But two years ago, he realized his value-oriented stock funds were getting left behind even as major tech growth stocks were continuing to climb.
Tennant decided to take long-term stakes in some big companies that he chose by looking at the top holdings of some better-performing growth funds.
That landed him shares of Lucent Technologies, America Online, IBM, Tyco International, Microsoft, Cisco Systems, Oracle, Dell Computer and General Electric.
Even with their recent declines, the stocks’ gains in the time Tennant has held them have been more than satisfying, he said.
Now, more than 70% of his portfolio is in stocks--a large percentage for someone his age. Still, Tennant said he has a long time horizon because he isn’t tapping his portfolio for daily living expenses.
“You might say that I’m investing for the next generation,” he said.
Linda Nelson, a teacher from Newbury Park, said the bulk of her money used to be invested in savings certificates, but in the mid-1980s she gingerly stepped into stocks through mutual funds.
As she learned more about the markets, she began to invest on her own in individual stocks. Now, she not only manages her own portfolio, she’s also helping several family members with their IRAs.
“Almost all my assets are in stocks, with funds used primarily for diversification into small- and mid-cap stocks and international,” she said. “I’ve come a long way, baby!”
Here’s a look at how, and why, a number of individual Southland investors and investment clubs have shifted their portfolios toward tech in recent years:
Little Interest in ‘Old’ Sectors
Beach & Bay Investors club got off to a rocky start three years ago--largely because it tried to follow time-honored investment rules.
“We started off with the philosophy of having stocks that represent a wide variety of sectors and to diversify our portfolio,” said club leader Suzy Gruber.
Today, the club of 12 Newport Beach women has about 60% of its portfolio in technology, with shares of Cisco Systems, Microsoft, Intel and America Online. The group also bought Charles Schwab Corp., largely because of growing interest in online trading.
The portfolio still includes two of the club’s original picks, Citigroup and Johnson & Johnson. But there is little interest in adding more “old-economy” shares.
“The energy level in the room just peaks when you start talking about Nasdaq stocks,” Gruber said. “They don’t want to talk about Albertson’s or McDonald’s.”
Gruber and the group see little reason to diversify when old-economy stocks have fallen so far behind their tech peers. “We feel the future growth of the stock market and our country can be found on the Nasdaq,” Gruber said.
Gruber feels so strongly about the future of new-economy stocks, in fact, that she keeps more than 80% of her personal investments in tech and biotechnology stocks.
“That’s very aggressive, because my husband and I are in our mid-50s,” Gruber said.
Nasdaq’s recent roller-coaster ride hasn’t shaken her faith, although she admits big drops in tech stocks “make me sick to my stomach.”
But “you just have to kind of close your eyes and be confident in the companies you’ve chosen and let it shake out,” she said.
Investing in the Net’s Infrastructure
Susan Brainin-Martin’s confidence in technology stocks stems from her work with Internet start-ups: She runs a technical consulting and recruitment company called Leading Edge Consulting Inc. in Los Angeles.
“My personal investment strategy lies with . . . companies that provide the infrastructure for the Internet and information processing, as opposed to the dot-coms,” she confided. “I don’t invest in any of the dot-coms. They scare me.”
“Stocks like Cisco, Oracle and Sun Microsystems are really solid companies,” Brainin-Martin said. “I know people consider them to be inflated, but they [have] . . . good earnings and good potential” for the long run.
She also owns JDS Uniphase, Applied Materials, Qualcomm, PMC Sierra, Covad, Compaq, America Online, Lucent and MCI WorldCom, among others.
“I study these companies on a daily basis through my work and watch them evolve,” she added. “I am not a gambler.”
Although she’s committed to tech issues, she acknowledged that she might selectively “lighten” her holdings to lock in profits on a few of her highfliers.
Hanging On to the Value Fund
Charles Jones, 61, of Calabasas describes himself as a buy-and-hold investor. Most of the time.
“Every time I have switched from one strategy to another, the one I got rid of came back,” he complained. “Jumping around is usually a fool’s game.”
Still, he dumped his fixed-income and real estate funds two years ago and jumped on the tech bandwagon. “I figured that if I didn’t get into technology, I was going to miss the boat,” he said.
His timing was great. The technology fund he bought has posted about a 70% gain in the last year and a half.
He also was a net winner when he switched out of a fund that invested in financial and consumer goods stocks and into one that concentrated on Nasdaq 100 stocks, primarily technology leaders.
Still, he didn’t shift everything. He’s got stock in utility Edison International, to which he remains committed. And he holds on to a large-cap value fund despite lackluster performance in recent years.
“I don’t want to put everything into technology,’ he said. “The value fund I have isn’t doing anything now, but I figure it’s going to come back eventually.”
Spinning Off an All-Tech Portfolio
Ingelis Jensen’s investment club was worried about the increasing weight tech stocks held in its portfolio. At the same time, members didn’t want to give up the spectacular gains that have more than doubled their portfolio’s value in the last year, to $51,000.
The club solved the tech versus diversification issue in much the same way some companies have: by creating a spinoff.
Professional Women’s Investment Club, whose 15 members hail largely from the San Fernando Valley, last year created a second club with an all-tech portfolio. The two clubs are comprised of many of the same members; all meet to discuss stock picks for the regular portfolio before turning their attention to the all-tech version.
Separating the two has allowed the club to take a flier on issues deemed too risky for its general portfolio. “Technology stocks are so volatile, you never know what’s going to happen,” Jensen noted.
The spinoff was created in July, and already its members’ $25-a-month dues have turned into a $12,000 portfolio. The holdings include telecommunications software company Vertel, Lucent Technologies, data storage company EMC and Internet retailer Amazon.com.
Both the tech and the regular portfolio hold MiniMed, a firm that makes microinfusion systems for diabetics.
Even with the spinoff, the club’s regular portfolio is still more than 50% invested in tech, largely thanks to spectacular gains by Oracle and Intel. The club has been reluctant to sell those winners to diversify, although lately it has been looking harder at retail stocks, Jensen said. Its most recent purchase: Bed Bath & Beyond.
The surge in tech stocks has had another effect: It has helped curb the club’s tendency to hold on to losers too long, Jensen said.
“We’ve changed from holding them forever to holding them for a reasonable period and then selling” if the stocks underperform for two to three years, Jensen said.
Ignoring the Rule of Diversification
The University Park Investment Club has been ignoring the idea of diversification for months now--with excellent results.
The 24-member club’s portfolio has blossomed from $67,000 to more than $100,000 in seven months, thanks largely to its tech stocks, which make up 64% of the portfolio’s assets.
In fact, the club has 32% of its money in a single tech stock, database software giant Oracle. The club paid about $4.40 each (split-adjusted) for their Oracle shares, which now are worth about $78 a share. Other winners include Cisco and Applied Materials.
The club isn’t just watching its tech stake grow with the market; members have been actively winnowing out old-economy stocks.
Members recently voted to dump market laggards Carnival, a cruise line company, and mortgage lender Federal Home Loan Mortgage Corp. (Freddie Mac) to buy cell phone maker Nokia--”and we’ve done brilliantly” with those decisions, said club leader Leonard Wines, 72.
In its 14-year history, the club has tended to buy growth stocks with a good “story” and hasn’t worried much about diversification across industry sectors.
Still, the increasing tilt toward volatile tech stocks does worry some club members, Wines admitted. But the majority reason that the portfolio could now suffer an enormous loss and still be ahead.
For example, Oracle could lose more than 90% of its value before members would face a loss.
“Everywhere you go, they say diversify, but I don’t see why,” Wines said.
Trying to Maintain Buy-and-Hold Identity
The Stocks & Blonds investment club has more than half its portfolio in technology stocks, but recently lost two members who thought the group should be investing even more heavily in the new economy.
“We weren’t going fast enough for them,” said leader Jean Smeriglio ruefully. “But we’re not in it for a fast turnaround.”
The five-member club is trying to maintain its identity as a buy-and-hold investor in a diversified mix of stocks. But discouraging results, and the need to pay off defecting members, caused it to sell some of its old-economy stocks such as tractor maker Deere and fast-food chain Wendy’s.
The club also had to sell one of its oldest holdings, Hewlett-Packard, to raise cash to pay off the departing members. The group, which was founded three years ago, originally had planned to hold on to each stock purchase for at least five years.
“That was like pulling teeth,” Smeriglio said of the recent stock sales.
Still, the group’s other new-economy picks have performed even better than Hewlett-Packard. The club has owned Cisco and Intel since 1998, purchased ADC Telecommunications late last year and recently added wireless technology leader Qualcomm.
The group’s most recent purchase, however, was discount retailer Ross Stores. Indeed, members now are searching for other stocks outside the dot-com sector in order to diversify.
“We’re trying to diversify and get smaller and mid-cap stocks,” Smeriglio said. “But then we watch them [tech stocks soar] and wonder, ‘Gee, did we make a wrong decision?’ ”
Kathy M. Kristof can be reached by e-mail at kathy.kristof@latimes.com. Liz Pulliam Weston can be reached at liz.pulliam@latimes.com.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Club Favorites Then and Now
Major technology stocks accounted for four of the 10 most-popular issues last year with U.S. investment clubs. By contrast, 10 years ago not even IBM--then in its heyday on Wall Street--ranked among the top 10 club issues of 1989. A look at the most-popular club stocks of 1989 and 1999, in terms of the number of clubs owning the shares (technology companies are in boldface):
*--*
1989 1999 Rank Stock Rank Stock 1. McDonald’s 1. Intel 2. Wal-Mart 2. PepsiCo 3. Aflac 3. Merck 4. PepsiCo 4. Lucent 5. AT&T; 5. Home Depot 6. Walt Disney 6. Cisco Systems 7. Pfizer 7. Aflac 8. General Electric 8. Diebold 9. Abbott Labs 9. Motorola 10. Waste Management 10. Clayton Homes
*--*
Source: National Assn. of Investors Corp.
