How much of a Nasdaq rally do we need?
The Nasdaq is now 40% off its 5,000 high from earlier this year. A natural assumption might be that in order to recoup your paper losses, the Nasdaq must rally back to its previous high. This is not true.
The Nasdaq composite index includes all the stocks listed on the Nasdaq stock market -- around 5,000 -- weighted in proportion to their market value (based on the last sale price multiplied by the total shares outstanding).
You must remember that the Nasdaq was driven to its high of 5000 in large part by speculation in internet stocks like stamps.com and priceline.com -- you get the picture -- companies that will never recover. If a Nasdaq rally occurs, it will be limited to a much narrower band of stocks -- companies with valid business models, substantial earnings and profits growth, and high barriers to entry. If you have been holding these stocks all along (as opposed to worthless internet stocks), you will probably recoup your losses long before the Nasdaq hits 5000. In fact, I would not be surprised it the Nasdaq does not retest its high for another two years. But in order for the Nasdaq to reach 4000, it would probably be necessary for many of the stocks that you are holding to hit new highs, which in turn would enable you to recoup your losses.
Now I admit to have been holding a few of these worthless internet stocks earlier in the year -- CMGI, Yahoo, and Amazon. By dumb luck more than anything else, I sold these at a profit. And I will never own them again, may lightning strike me if I am lying. (Yes, that's right, I consider Yahoo to be a worthless stock, and right now the market agrees with me.)
Currently, all of the stocks I hold meet the following criteria:
1. Hypergrowth earnings and profits
2. High barriers to entry
3. Market leaders
4. Intellectual property
5. Solid management team
6. Disruptive technologies
7. Demand outstrips supply
In the long run, I have every confidence that these stocks will outperform the dow and the S & P 500. In the short run, everything is going in the toilet. That doesn't mean you should flush it. |
