Burned investors still seek next hot stock

By DUNSTAN PRIAL

Associated Press

NEW YORK — Less than a year ago, in the midst of an unprecedented run-up in the stock markets, a small but influential group within the mutual fund industry repeatedly warned investors against chasing "the next big thing."

Now that last year’s "next big thing" — namely the Internet — has fallen on its face, are chastened investors ready to return to tried and true methods of long-term investing?

Not likely, say most analysts.

"My impression is that they haven’t learned their lesson yet, but they’re getting a lot closer to learning it," said Vanguard Group founder John Bogle.

As the value of technology stocks surged higher and higher the past two or three years, and as mutual fund companies increasingly touted short-term performance figures, few skeptics voiced louder concerns than Bogle.

Bogle has built his career on the concept of long-term investing. He is widely regarded as the father of index fund investing, a conservative strategy in which the goal is to mirror the long-term performance of the broader stock market.

Sector-specific mutual funds, on the other hand, such as the myriad technology funds that proliferated in the late 1990s, are designed to outperform the broader market.

Bogle said investors who failed to heed the warnings were bound to get burned.

Most analysts believe investors are simply waiting for the next bandwagon to emerge. Witness, for example, the current popularity of biotech stocks.

"They never learn," said Jim Melcher, president of Balestra Capital Management in New York.

Melcher explained the dynamics that led to a vicious cycle of unrealistic expectations, overvalued stocks and, ultimately, the inevitable crash that decimated much of the technology sector this year.

The bull market that ran through most of the 1990s led many investors, especially young investors who had never experienced an extended downturn, to believe that the good times would never end. As the end of the decade approached, the advent of a new technology — the Internet — with seemingly unlimited growth potential appeared to lend credence to that unwavering sense of optimism.

Money poured into the handful of Internet stocks that emerged via high profile initial public offerings, and stock prices subsequently soared into the stratosphere. As the values increased, mutual fund managers felt compelled to buy them.

For a while, the stocks continued to see phenomenal gains, and fund investors grew accustomed to double-digit and even triple-digit annual gains. The burgeoning financial media fed this cycle by rating funds first on an annual basis, and then on a quarterly basis, perpetuating the trend toward short-term investing.

Both Bogle and Melcher believe the Internet phenomenon may well have been the most extreme example of a stock market frenzy in history, primarily because of the amount of money available for investing at the time.

But the experience was hardly unprecedented, they said. History is dotted with similar episodes, including the runs on conglomerate and bowling stocks in the "go-go" 1960s, and radio, utilities and automobile stocks in the roaring 1920s.

So no one doubts that the "next big thing" is probably just around the corner.