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[TTHQ Staff]

BEING STREET SMART
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Sy Harding

Searching For ‘The Next Big Thing’! February 25, 2005.

Every investor dreams of getting in on the ground floor of ‘the next big thing’; the next new technology, perhaps the revolutionary new industry or company that currently exists only in the minds of a couple of guys working on their dining room table, or in their parents’ garage.

After all, those investors who got into Microsoft early and just held onto the stock, were made multi-millionaires by that confidence.

Unfortunately, the odds are significantly against finding another Microsoft. Choosing a stock (out of the more than 17,000 that are out there) that will hold up for even two or three years is difficult enough, let alone hitting one that will hold up for a couple of decades. Circumstances change for even the best stocks. And certainly not all stocks are good stocks.

The ‘next big thing’ is almost sure to be nanotechnology, and already investors are losing sleep on how they can get in on the ground floor. As you probably know, nanotechnology carries the promise of being able to produce atomic and molecular size structures that will dramatically change our lives. We’re familiar with meters, centimeters, even millimeters. A nonometer measures one billionth of a meter. If you prefer decimals, it’s 000000001 of a meter.

The technology, taking place in the invisible subatomic world, will eventually produce incredible advances in the quality and usefulness of almost all products, from medicine and medical equipment, to music, clothing, telecommunications, and virtually anything with electronic circuitry.

It is several years from being put to use in a practical way. Much more research and development will have to take place. But just the word nanotechnology is enough to create the same excitement among investors that the phrase dotcom produced in 1999. And the search is on for any company that can be even remotely perceived as related to nonotechnology. It won’t be long before venture capitalists and entrepreneurs discover that all they need do is incorporate the letters n-a-n-o in their name and they’ll have the key to selling investors any number of ‘story’ stocks.

Investors will need to remember how it goes with start-ups and new technologies. They make great trading vehicles but lousy buy and hold stocks.

It’s a lesson the market has been trying to teach for a couple of hundred years. Most of the early entrants in a new technology do not survive, and it’s virtually impossible to predict which few will.

The examples are too many to recount. But it’s not a new phenomenon. For instance, in the early 1900s, in the excitement after the development of the internal combustion engine, more than 4,000 companies were launched to produce automobiles. All of them apparently had enough going for them to attract investors who thought they were in on the ground floor of the next big thing. Obviously most of the companies did not make it, and investors in 99% of them lost their shirts.

It was a similar situation with the first wave of companies in such new technologies as airlines, biotechnology, radios, televisions, or any new technology you could name. Each time hundreds of start-up companies were launched that provided the promise of getting investors in on the ground floor. Each time, the vast majority, always including some of the most promising, did not make it. Their prospects and their stocks soared like Roman candles, and then, also like Roman candles, they sputtered and fell to the ground.

Computer technology certainly followed the pattern, with the early hot stocks like Commodore, Tandy, Wang and dozens of others long gone.

The most recent examples were the Internet and high-tech companies of the late 1990s. There were 637 companies brought public in initial public offerings in the 1999-2000 IPO craze. Almost all were considered to represent the next new big thing in technology or Internet services. All shot up quickly and excitedly. All then fizzled out even more quickly and fell to earth. More than 500 start-up Internet companies alone, including the most popular, like Priceline.com, E-toys, and Dr.Koop.com, totally disappeared into bankruptcy. The relatively few that survived saw their stock prices plunge dramatically back to earth. High tech companies in such ‘next new things’ as fibreoptics, biotech, and telecom technologies all followed similar trajectories.

Those who buy investments with the intention of holding them regardless of how conditions change wind up papering their walls with the waterlogged stock of a Wang Laboratory, Polaroid, JDS Uniphase, or Dotcom nightmare..

Buy and hold investing never did work well. In the modern world it doesn’t work at all. It is necessary to be aware of the market’s seasonality, of the tendency for stock prices to cycle between undervaluation and overvaluation, and the history of the market suffering a bear market on average of every three years.

I remind you of this now since the market’s current favorable season is entering its fifth month. I believe the near-term economic numbers remain positive enough to support the stock market for awhile longer, in spite of rising interest rates and other concerns. However, I also expect that once the market’s favorable season ends, perhaps even before, the market will run into significant trouble.

Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.