Technology - what should investors do now?

Technology investors in Singapore, and around the globe are looking at substantial losses on their holdings over the last five years. Is now the time to give up, realise those losses and flee the sector, never to return?

At Henderson Global Investors, we would argue that the answer is a resounding no. History often has much to teach us. To illustrate our point, it is helpful to look at a prior stock market bubble collapse. From August 1924 to August 1929, the Dow Jones Industrial Index rose from 103 to 380 (a rise of 268%). These high returns attracted a large number of investors, many of whom had never invested in equities, just as the strong returns in the technology sector attracted investors in the late 1990s.

In both cases, valuations were pushed to very high levels, and the large amount of money raised led to over-capacity, leading to a stock market collapse. The Dow Jones Industrial Index fell for the next 34 months, reaching 43 by June 1932 (a fall of over 88%) - again spot the similarities to the bursting of the recent technology bubble. Many investors sold, at a huge loss, vowing never to invest in equities again. A brave few held on, believing in the long-term fundamentals. Over the next 5 years, the Dow Jones Industrial Index rose to 169 (a gain of 293%).

Currently the Dow Jones Industrial Index trades at nearly 10,000 - those who held on were proved correct, those who sold lost that money forever. We firmly believe that the long-term fundamentals for technology remain intact. Moore's Law continues to drive new products and drive the cost and size of new as well as existing products down. Valuations are, on many measures, near the lows we have seen over the last 15 years. It would be a tragedy for investors to compound the error of buying near the top, with the second error of selling near the bottom.

Update by Stuart O'Gorman, Director, Technology Investment October 2004