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Tech fads to tech trends
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June 1, 2000: 6:00 a.m. ET
Where do tech investors go from here? Ask if the trend is your friend
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Psst. Wanna know the next big thing in tech investing? Steven Witt has got one word for you -- optics.
"Optics. That's all your going to hear about for the next couple of months." Witt, the managing director of the Silicon Valley-based Firsthand Funds said. "You'll see herds of investors in there."
Should you care about the next big thing in tech investing? Absolutely not, he continued. But don't let that stop you from jumping onto the next tech bandwagon. No one else seemed to hold back, at least before April, when of course numerous tech bandwagons crashed.
There had been plenty of shuffling in the tech sector before Nasdaq peaked in March. First it was portals. Then e-tailers. Then B2C. B2B? Love it. No sooner do investors latch on to one mania than they ditch the other. "It's like investor candy. Everybody wants some," Witt said. Why? Why not? "The reason is not known entirely to everyone."
What goes up fast can come down, oh yes
In an era when information moves faster than many investors can research stocks, momentum and fad investing have become all the rage. Now, financial planners and fund managers say they hope investors have come to their senses.
"There haven't been the tried and true research methods that have been used for years and years," said Peter Kris, managing director of Van Wagoner Capital Management. "Things started moving faster and faster, and hence you had more fads in the market."
 Remember Linux? A lot of people would like to forget. Red Hat (RHAT: Research, Estimates) closed just over 16 Wednesday, more than slightly off its high of 151-5/16. VA Linux Systems (LNUX: Research, Estimates) has shown the same trajectory. It closed Wednesday at 39-13/16, a far cry from the 320 it hit on its opening day last December.
Or take B2B. Ariba (ARBA: Research, Estimates) closed Wednesday at 52-1/8, less than one-third its high of 183-11/32. After the B2B fad took off in January, it ran up for two months, then plummeted. Ariba made a huge splash for the B2B market but ultimately "drowned in its own wake," Witt said. The stock -- as compared with the company -- was too successful too quickly for its own good.
Too many IPOs, not enough testing
With the meltdown in tech stocks, it's now crystal clear to almost every investor that the technology easy pickings are gone. Tech pundits say the field is fraught with problems, at least for investors.
"Companies hit the markets before they had their sea legs," Kris said. "The investment sentiment was, 'You gotta get in. Don't worry about the rest of it, the business, but I gotta get in.'"
Not surprisingly, investment bankers took advantage of the boom in Internet and tech stocks and took a lot of venture-type companies public, according to Alberto Vilar, a portfolio manager of the Amerindo Technology Fund (ATAHX: Research, Estimates).
"Clearly there were way too many marginal underwritings," he said in a conference call to announce two new Amerindo tech funds that launched Tuesday.
Check your mutual funds
So how do you invest in technology, if it's like walking through a minefield? Many financial planners say a tech fund is the way to go. Fund managers who were embarrassed when they missed the tech run-up are champing at the bit now that stock picking has become more than a game of darts.
Still, many investors will go it alone, too. Maybe they can learn a little from the way tech watchers pick their stocks.
Make the trend your friend
Short-term traders and day traders have a mantra, "The trend is your friend." They mean that a day trader needs to ride a wave of stock movement, either up or down.
That's not practical or wise for most long-term investors. But tech experts say a similar kind of philosophy serves investors well when picking tech stocks.
 The younger you are, the more aggressive you can afford to be with your technology investing, according to Greg Zandlo, president of North East Asset Management and a certified financial planner.
Still, he has retired clients that have 40 percent of their portfolio in technology. One couple is "very heavily invested in individual technology companies," mainly such large cap stocks as Nokia (NOK: Research, Estimates), Ericsson (ERICY: Research, Estimates), Intel (INTC: Research, Estimates), Sun Microsystems (SUNW: Research, Estimates) and Cisco Systems (CSCO: Research, Estimates).
"They know it's volatile, but if there's going to be quantum growth, that's where it's going to be," Zandlo said.
Ride that surfboard, baby
It's not surprising that many investors go that safer route. Tech fund managers, of course, broaden their portfolios with smaller-cap stocks, looking for more rapid growth than is possible with a well-known, large company such as Cisco.
For less well-known names, the going is trickier. In optics, for instance, "if you're in one of the better companies -- (such as) Ciena (CIEN: Research, Estimates), JDS Uniphase (JDSU: Research, Estimates) -- they're going to do fine whatever," Witt said. But that doesn't apply to all optics companies by any stretch of the imagination, he added.
The Firsthand Funds' flagship, the Firsthand Technology Value (TVFQX: Research, Estimates) fund, has had the most impressive long-term returns in technology, according to Morningstar. By focusing on unheralded, early-stage companies, it has posted a five-year annualized total return of 57 percent, ranking it tops in an albeit thin field. Not many specialty tech funds have been around that long.
The managers of the Firsthand funds, led by Kevin Landis, make early selections of companies and ride them through the momentum crazes. Tech Value keeps its balance through the ups -- the fund is up 124 percent over the last year -- and downs -- it is down 25 percent over the past three months. It mixes large cap stocks such as AT&T (T: Research, Estimates) and Corning (GLW: Research, Estimates) --- both among its top five holdings -- with small caps.
Landis likes a company such as Zoran (ZRAN: Research, Estimates), an Israeli chip manufacturer that makes parts that are used in digital video players like DVD machines and in digital cameras.
Fads make fast friends and fast losses
Strategy? Identify the underlying technology, decide whether it will benefit from a trend -- in Zoran's case, the rapid adoption of DVDs and digital cameras -- and then hold on to the company.
"It's like a tiny surfboard on a giant wave," Witt said. "You try and do your homework, get on that surfboard and hang on."
Van Wagoner's Kris agrees. He said there's a difference between fads and trends.
Skip the fads but identify the trends. For instance, Van Wagoner bought into Ariba in 1997, before it went public, and has ridden its ups and downs. But the business basis for buying into B2B hasn't changed, and Ariba is still a leader in that field with strong fundamentals.
"It is a broad trend in the market, but then it became fashionable," he said. They still hold Ariba, even though it may fall out of favor. "We're sort of the brown shoes on the tuxedo. But when we come back into fashion, we continue to do the same thing."
Scott Kahan, a certified financial planner and president of Financial Asset Management in New York, said it's exactly times like now, when good stocks fall out of fashion and are beaten down, that you want to buy.
That runs counter to how investors naturally act and feel, though, he said.
"They're just looking at technology as a big group, and jumping on the leaders," Kahan explained. "The average investor, they look at stocks that have been beaten up and they don't want to buy them."
But he thinks many investors, particularly ones that are new to the market, are learning a lot of valuable lessons now. Investors that jumped on the tech fads while they were hitting their peaks up or that sold in the capitulation selling while they were crashing learned expensive lessons.
Will the days of tech fads return? Kahan thinks there's a new sobriety to the market.
"More people are starting to talk about earnings as a way to pick stocks," like the good old days, he said. "A lot of investors just never understood that in the last two to three years." 
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