Tech stocks in the last 20 years

I tried to use my historical database to test out NASDAQ 100. The return is great. To illustrate, from 1/4/1999 to 6/6/2001, the annualized return is 54% vs SPY’s 1.6% without considering dividends.

Do not ‘wow’ too early. The reason of the high performance is due to the survivor bias. Many internet companies were taken out from the index and/or the database, and hence the performance as a group is deceivingly high.

The following chart is for the popular high tech companies for the selected 10 years. For every one of the following successful high tech companies, there must be many that do not make it.

	1990-2000	2000-2010
	Annualized Return	Annualized Return
Microsoft	940%	-4%
EMC	7500%	-7%
Apple	20%	65%
Dell	8200%	-7%
Average	4000%	12%

The above figures are estimates for demonstration without considering dividends and compounding. Dell has been privatized today. Now, we can draw some conclusions.

·         Tech stocks usually beat the S&P500 index. Risk usually pays.

·         1990-2000 are the golden years for tech stocks.

·         2000-2010 are not so good for tech stocks due to the crash of 2000. If it is not for Apple, the return of this portfolio would be negative.

·         Except with Apple, it indicates the first ten years (or the early phase) of the tech stocks give the best returns. After they become mature companies, they seldom maintain the same growth rates. The worst of the group in the first 10 years become the best after 2000.

Buy when the market does not favor this sector

Interestingly, you should buy when the institution investors are dumping such as buying Apple in May, 2013 as recommended in my book Scoring Stocks. Ensure they have value first by scoring them fundamentally and allow at least one year for the market to recognize the values. 

I reviewed my old blog and found some bargains I described in 12/03/2012. Here is the performance summary. Again, all performance returns are annualized.

The stocks are AAPL, CSCO, INTC, MSFT, XRX, STX, WDC and ALU.

	One year later	Two years later
Ann. Return	84%	59%
SPY  Ann. Return	28%	23%
Beat SPY by	200%	157%

Interestingly, AAPL is the weakest performer in both tests. It must start with a high price.

Why the tech companies perform worse after the first 10 years? Most likely it is due to poor management:

·         When they are rich, they lose their entrepreneur spirit.

·         They care about enjoying their options and do not want to take risk in new and better products. Besides Xbox which was almost cancelled by the management, how many successful new products Microsoft has after Office?

·         Many of them were wrongly promoted from marketing and sales. They are NOT the ones who create innovative products such as Apple’s products.

·         Losing the visionary leaders such as Steve Jobs.

·         Other companies, foreign and local, are catching up.

Tech companies need to make better mouse traps continuously and with enthusiasm.