Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 42)

Risk and Return (part D)

by

Charles Lamson

Market-Value Risk

Market-value risk refers to the market turning against or ignoring your investments. It is not uncommon for unexciting industries to get lost in the mad rush to technology like we saw in the late 1990s.

Many of these stocks languish not because there is anything fundamentally wrong, but because the money was chasing something sexier with promises of greater returns.

If you had run a stock-screening program in December 1999 like Ken Little did in his book Alpha Teach Yourself Investing in 24 Hours, you would have found the category of value stocks contained some of the most familiar names in American industry:

• Bank of America
• Ford Motor
• Philip Morris Companies
• General Motors
• Bank One

Do these look like bargain basement to you? Nevertheless, they were selling under their intrinsic value as defined by Morningstar.com. 

At this moment, the high tech stocks have caught the market's imagination, and small wonder. The leaders have posted almost incomprehensible gains, growing from a project in someone's basement to companies with market capitalization in the hundreds of billions of dollars.

PROCEED WITH CAUTION The great stock market expansion of the 1990s was primarily carried by the technology sector, especially the last few years. Analysts worry about a market balancing on one leg.

One of the major concerns professional market watchers have is that we ended the 1990s with tremendous gains in all the market indicators, but the advances were largely driven by one sector: technology.

If the technology sector was taken out of the equation, the market would have experienced an advance, but probably not on the scale we have seen. In 2000, people were asking, "What happens if technology stocks collapse? Will they drag the rest of the market down with them?"

This is another danger of market-value risk: The whole market will reverse. It is not uncommon and, it is actually to be expected for high-growth stocks to have peaks and valleys.

On page 241 of his book, Ken Little writes:

One Internet company I am familiar with experienced a high of around $100 and a low of $24 per share in a four-month period. That kind of roller coaster is not for the faint-hearted and may be a little more exaggerated than most, but it points out how vulnerable a stock can be.

When a few of the leaders in the technology sector have had a bad day, you can rest assured the market will have a bad day also. The market can, does, and will lose ground at some point in time.

Long-term investors should be prepared to ride out the valleys. Shorter-term investors need to protect themselves because they do not have a large number of years to ride the market back up, as it will surely go.

Again, the best protection against market value decline is diversification. We all want to be invested in the current stars of the market, but those stars have a habit of falling. Diversifying your portfolio to include a broad section of sectors and industries can cushion the fall.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 240-241^

END

PROCEED WITH CAUTION

The great stock market expansion of the 1990s was primarily carried by the technology sector, especially the last few years. Analysts worry about a market balancing on one leg.