Lessons learned
The high-tech bubble took investors on quite a ride. When it burst, many took a serious tumble. A few words of wisdom seem appropriate

October 18, 2001

For a couple of years during the high-tech bubble, even the most inexperienced investor couldn't lose in the stock market. All you had to do, it seemed, was buy 100 shares of some no-name dot-com company for $1 a share and watch them increase in value over the next few weeks to $10 or $20 or $100, then take your profits and do it again.

Financial advisors and investment managers warned their clients that these companies had no earnings, no track record, no product and no hope of earning 100 times as much as their shares cost. But their warnings fell on deaf ears among investors who didn't know a ratio from a radish.

"In 1999 and 2000, individual investors became more brilliant than their financial advisors," says Kim Shannon, chief investment officer and senior vice-president of Merrill Lynch Investment Managers Canada Inc. "They'd get a hot tip, their advisor would try to talk them out of it, they'd go ahead and invest on the tip, and it would score. Often, individuals were doing better than their advisors."

By 2000, you couldn't step into an elevator, talk to a waiter or flag down a cab without hearing about Nortel and the money to be made in the stock market. Everyone was buying stock, and you felt like an idiot if you didn't have a story to tell about some obscure company whose rising share price had paid for your vacation in Mexico or your children's horseback riding lessons.

"Whenever there's herding, even smart people get caught up," says George Klar, vice-president of Beutel, Goodman & Company Ltd. "What's worse, the smartest people often lose the most money. They resist the trend, then they see people not as smart as they are making money and they decide to jump on the bandwagon." Unfortunately, many investors neglected a critical factor in evaluating their investments. "They forgot to evaluate risk," Shannon says.

The risk of investing in a company that has never sold anything is that the value of its shares will eventually reflect the true value of the business. The risk of investing in an established company whose shares sell for 100 times earnings is that the value of the shares will drop to a more realistic level. And that's what happened earlier this year.

Some investors managed to sell their shares before the bottom dropped out of the market. Many others didn't. For the ones left holding a bag of worthless stock, several lessons are inescapable:

• "You have to have respect for the marketplace," says Irwin Michael, portfolio manager for ABC Funds. "It's better to be a year early than a day late."

• The stock market follows a cyclical pattern, says Shannon. If a stock goes up in value, it will eventually come down again. Not all stocks rise in value at the same time, however, and wise investors diversify their holdings to balance the impact of rising and falling prices. "People will become more interested again in maintaining diversity in their portfolios," explains Shannon.

• "This period has taught us that it's good to have a consistent investment philosophy," says Bob Tattersall, president of Howson Tattersall Investment Counsel Limited and portfolio manager of the Saxon Small Cap fund. Apologizing for sounding pretentious, Tattersall says, "If you haven't internalized your approach to seeking out investments, you'll get blown hither and thither. You need a methodology. A philosophy alone is like saying I believe everything in the Bible. But that isn't a sufficient guideline. You have to know how to put your philosophy into action."

• "Stick to companies that make physical, tangible products," advises Tattersall on a more practical note.