Dot-Com Mania Is More Selective Than You Think

One of the basic truisms about investing that’s very easy to forget, especially in the middle of the kind of bull market we’re in, is that it isn’t a stock market, but rather a market of stocks. In other words, even if investors are generally feeling bullish, that bullishness is not uniform. It does not lead them to forget about distinctions among stocks. Even during the Dutch tulip mania, after all, there were some bulbs that seemed priceless and others that you could buy.

In the most general terms, we all recognize this. Last year, for instance, the cliché became that everyone wanted to buy tech stocks and couldn’t deal with the large cyclical or commodity companies. Meanwhile, aluminum producer Alcoa was up 119 percent for the year, more than any other Dow stock, so investors were a little more discerning than “tech good, no tech bad.” But as a broad generalization, the cliché was accurate enough.

The problem comes when the cliché is taken to mean that investors are so blindly rushing after stocks of a certain kind that they’re not paying any attention at all to the differences among all those stocks. This is a problem because if it’s true, it means that the market can’t be doing what it is meant to do: channel capital to those companies that will use it most productively and away from those companies that will not. And it’s a problem because if it’s false … well, it’s just always a problem when a conclusion is false.

In this case, that’s precisely what that conclusion is. Perhaps the most remarkable thing about this market is that even in a time of seeming universal buoyancy, when the Nasdaq was up 80-plus percent in 1999 and you could not seem to go wrong as an investor if you were buying anything with a .com at the end of its name or a B2B (business-to-business) label attached to its business model, there are lots of tech stocks that are not doing especially well. More to the point, there are lots of tech stocks that have done really well and then been severely punished, and on any given day what you’re most likely to see is not a move upward or downward in which everyone’s participating, but a surprising mix of moves.

Take this morning, when the Nasdaq opened up a blistering 120 points, then quickly tumbled more than 200 points before rallying yet again (it’s currently up 15 points). Even as some of the tech stalwarts like Cisco and Microsoft (both of which I own) were in free-fall, Net powerhouses like Amazon were up strong on the day. And even as some of the B2B giants–JDS Uniphase, Foundry, Redback (companies you probably haven’t heard of but which now sport $20 billion plus market caps)–were zooming, others were headed in the opposite direction.

On a deeper level, there are now a host of Internet stocks that no longer participate in .com mania. IVillage, Marketwatch, MP3,, The Globe,, Wit Capital: All of these companies were once darlings of the market and now see their stocks trade in very narrow ranges not much above–and in some cases below–the prices at which they went public. You could say this is just a case of market sentiment shifting. But it’d be more accurate to see it as what it is: a collective verdict on the long-term profit possibilities of these companies. Which is, after all, what market sentiment ultimately means.

Of course, investors overreact, in both directions. And sectors do become hot and witness huge inflows of capital based mainly on trend-following. But that kind of indistinct investing doesn’t last too long, which is why the idea that investors today “don’t care about profits” is a misreading. If investors didn’t care about profits, they wouldn’t distinguish as carefully as they ultimately do between one unprofitable company and another. In the end (and this is a good thing), everyone doesn’t win. Even if those everyones have .com at the ends of their names.