It's almost universally agreed that timing the market, at least on a consistent basis, is impossible. It's hard to demonstrate that individuals have the skill to determine when to buy and when to sell, at least in a statistically meaningful sense. In a way, this is consistent with the thesis that the day-by-day meandering of a stock, or a stock index, is random. Actually, they appear to be more or less chaotic. In other words, while day-by-day or week-by-week changes appear random, there seems to be a pattern to the whole thing, which could itself change dramatically and with no apparent reason. This unfortunately convinces some investors that understanding the trend is just a question of refining a theory a little bit more, then riches will surely follow.
One reason why most investment advisors recommend dollar cost averaging, or making regularly scheduled investments, in stocks and mutual funds, irrespective of the state of the markets, is that the issue of timing the market becomes moot. The investor may feel like a fool because they bought just before a market correction, but they can avoid feeling stupid because they didn't invest before a market rally. Besides, it's a bit like savings: if you don't put money aside regularly, you probably won't put money aside at all. I think that one of the principal merits of the Canadian RSP system is that it tends to encourage reluctant investors to contribute, if for no other reason than to save on taxes.
So what's the point of this column? I make presentations to investors of various stripes fairly regularly, and I usually lead off with my view of where tech markets are headed. Since early 2000, my general tone has been negative, which has not been very popular. My tone right now is still negative, but for different reasons. Back then I felt tech investors had been gripped by collective insanity. Now I think we are likely to see a temporary slowing of growth in high tech company earnings.
As for my rationale, the economy in general seems to be slowing down. The US raised interest rates through the year, which has a global impact because the US dollar is the world reference currency. Higher interest rates slow the economy, higher US rates slow the world economy. This slowing will have a disproportionate impact on capital-intensive businesses such as telecom service providers, since it has been their spending on infrastructure driving much of the boom in tech earnings, directly or otherwise. If higher interest rates were not enough, the price of oil increased dramatically, which has a broad negative impact on many aspects of the world economy.
One thing I learned a long time ago is that most companies don't prosper if their customers are doing poorly. This doesn't mean successful tech firms are necessarily going to lose money, lay off employees or go broke. However, it's hard to believe investors are going to snap up technology stocks when their operating results are not meeting expectations. So, I think the technology market will remain weak until those expectations have been adjusted downward, which hasn't happened yet.
In case I'm wrong, this column has been programed to self-destruct in four weeks.
Brian Piccioni is an equity analyst at BMO Nesbitt Burns. He can be reached by phone at 416-359-5761, fax 416-359-5356 or e-mail brian.piccioni@bmonesbittburns.com.
