Hold On Tight During Mr. Wall Street’s Wild Rides

In this special edition of Stock Exchange, Times staff writers James Peltz and Michael Hiltzik review Tuesday’s wild stock market, and what it means for investors.

Jim: The market just closed, Mike, and I see the Nasdaq composite index--home of all those highflying tech stocks--slipped about 75 points, and the Dow Jones industrials edged down 57 or so.

Mike: Looks like just another day.

Jim: Hardly. I’m really, really upset about what happened.

Mike: Why?

Jim: Because this morning I could have bought Sun Microsystems for $72, and it closed around $90. Or I could have bought Oracle at $65 and seen it jump to $75 before the day was out. Same with Dell Computer: Could have snapped it up at $48 and now it’s worth $54 and change. Getting my drift here?

Mike: I’m getting it, but the fact is those buying opportunities at the bottom were a little like those cow towns in Kansas or Nebraska, you know, the ones where you don’t blink as you drive through or you’ll miss ‘em. Tuesday’s market turned on a dime, and by the end of the day a lot of major stocks were back where they were at sunrise.

Jim: And what’s weird is that there was no particular news today, other than the residue of the Microsoft antitrust decision Monday, which sparked a sell-off of the tech stocks that day, too.

Mike: But that was just a trigger for something more fundamental, which we’ll explain.

Jim: Exactly. Now, no doubt a lot of investors are downright confused about what’s going on. I mean, they’re driving to work, listening to the radio and they hear that Nasdaq has plunged 400 points. Then they get home and find it closed with little change. And now all the pundits, and pundit wannabes, are guessing about what will happen next.

Mike: A silly exercise. But I feel confident about one thing: We’re in for three or four months of volatile swings. Probably not on this scale, but investors have to come to grips with the fact that many of these stocks--even after this latest carnage--are still trading at outrageous valuations.

Jim: Or in English, they’re still priced too high.

Mike: Right.

Jim: Like we’ve said before, investors have to put days like this in perspective. Translated, that means don’t panic. In fact, it wouldn’t hurt to stop watching the market every hour or even every day for a while.

Mike: I imagine the crack journalists at CNBC and those other financial news stations must have reported the early hours of Tuesday’s market as if a jetliner had gone down.

Jim: Then they had to figure out how to breathlessly explain why the plane suddenly got airborne again. The point is, if you were watching this coverage in the morning, you might have been prompted into selling, say, your Intel stock. You’d have missed a $2-plus gain for the day.

Mike: And overall, if you’re heavily invested in Nasdaq stocks, you’re generally about where you were on Feb. 2 of this year. And back then, of course, you were looking back over the previous 12 months, in which time you’d gained 65%, and saying, “I can’t believe I’ve made this much money.”

Jim: Now you’re getting to the heart of the matter. Simply put, no stock--technology or otherwise--can keep going straight up. They have to come back, pause, correct, call it what you want. And many of these tech stocks have gone up so far so fast that a day like this was bound to happen.

Mike: That doesn’t make it any less ugly.

Jim: Of course not. Who wants to wake up and find their Cisco Systems is down $10 a share? But that’s the problem in this age of instant information. Too many people are watching their stocks every few minutes, and losing sight of the big picture.

Mike: Wasn’t there a trader once--his name escapes me at the moment--who said he read the financial pages assiduously every day--but he always read the previous day’s paper. There’s a moral there.

Jim: Here’s another story for investors to think about. A little over two years ago, Oracle came out with quarterly earnings that upset Wall Street, and all hell broke loose. Oracle’s stock plunged, dragging down dozens of other tech stocks. You’d have thought the world was ending. Now, on that day Oracle--adjusted for splits since then--closed around $7.50 a share. On Tuesday, like I said, it closed at nearly $76.

Mike: You left out that not long after Oracle’s misstep, you and I in this column turned thumbs down on the stock.

Jim: Uh, never mind that. The point is, if you believe you own solid companies that still have strong growth prospects and good management, don’t panic because of a day like this, or even the past week we’ve had. There’s value there, and those stocks will come back--either in an afternoon or over a longer period. It’s just that, when those stocks get exorbitantly high in price, the market has to bring them back to Earth. The market has always worked that way.

Mike: And there’s something else to remember: Many of these stocks are now cheaper, which is why buyers swarmed all over them Tuesday. But it doesn’t mean they’re all cheap. Look at JDS Uniphase, the fiber-optic outfit. Yes, the stock rallied back from a huge loss Tuesday, but it’s still selling for 290 times its expected 2000 earnings per share! So you the investor have to decide: Are you comfortable owning a company that must grow like a weed to justify that price?

Jim: Remember, we’re not making light of this day. For more people than ever, this isn’t a casual bit of news, this is their retirement money, their savings, whether it’s invested in individual stocks or mutual funds. And understandably they get nervous and wonder if they should sell or do something.

Mike: None of them has a crystal ball, but the record speaks for itself. If their horizon is long enough, they should stay put, and I’m thinking of your Oracle example. Over time they’ll be better. But if you need to raise cash or want to lock in a profit by selling, then do it. It’s no more complicated than that.

Jim: Yes, it is. I still wish I’d bought Sun Microsystems this morning.

To suggest topics for this column, e-mail Times staff writers James Peltz (james.peltz@latimes.com) or Michael Hiltzik (michael.hiltzik@latimes.com).