Nasdaq in record bear market territory

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  What a difference a year makes! Just 12 months ago, investors were revelling in the runaway success of the Nasdaq stock market, which hit an all-time high of 5048.62 on March 10, 2000. On Monday, the Nasdaq Composite ended the trading session at 1923.38. That's a drop of 62% a stunning decline by any historical standard and the worst bear market in Nasdaq history. In fact, it's the biggest drop in any major North American index since the Great Depression.

What's made the Nasdaq plunge even worse is the huge psychological impact it has had. At the end of the '90s, many people were convinced we had entered a whole new era, both for the economy and for stock markets. "New Economy" stocks were the place to be: the Internet, biotech, wireless communications, software development, e-commerce. "Old Economy" stocks were history. No one was interested in retailing, mining, forestry, transportation, media and the rest.

What we experienced was a classic bubble. They have surfaced again and again throughout history, yet we never learn. The Nasdaq run-up was our generation's version of Holland's Tulipomania, that fabled period in the 17th century when tulip bulbs played the role of tech stocks, with crazed investors bidding up their prices to unbelievable levels.

Why don't we learn? Because it is so easy to be caught up by the lure of easy money, especially when we see everyone around us getting rich - at least on paper. And because as each frenzy takes hold, prominent voices can always be found to insist that "this time it's different" - that the time-tested laws that govern true value have somehow been repealed.

But it's never different. You can only pump so much air into a balloon before it pops. Nasdaq's balloon expanded to a tremendous size. But in the end, it too went poof.

No one escaped unscathed, unless they were completely in cash. In our Internet Wealth Builder newsletter, we took full or part profits in many of our tech stock recommendations, including Axia, Research in Motion, Burntsand (part), Celestica (part), Motorola, Gennum (part), AMCC, RF Micro Devices, and others. But we held Nortel for too long, on the basis that it is one of the world's leading technology companies. The stock will eventually recover but in retrospect we should have taken at least part profits.

However, we take pride in the fact that we warned our readers many times about the dangers in the high tech market, giving them time to act before the plunge began. Here's what we said, for example, in the first issue of 2000 when we gave our market outlook for the year:

"The high-tech party could continue to roar on for months. But the reality is that many of these stocks are extremely expensive and vulnerable to profit-taking at the slightest hint of bad, or even indifferent, news. So if you're sitting on some big gains, take a few minutes to review your position and decide whether you want to continue to leave all your chips on the table or put a few in your pocket."

So now what? The past year has been a nightmare for true tech believers. The drop has surpassed the previous worst decline in Nasdaq's history, a 59.9% plunge in 1973-74. However, that one was spread over 21 months; this one has happened in just 12. Even worse, it took more than five years for the Composite Index to recover from that tumble. It wasn't until early 1979 that the market regained the level it has been at when the fall began on Nov. 1, 1973.

And we don't know that we have seen the bottom yet. There could be more to come. Many Nasdaq stocks are still expensive when measured by traditional standards. The average stock is selling at more than 100 times the most recent earnings, according to a study done by the U.S. company InvesTech Research. Of course, many Nasdaq companies have no earnings at all, which exacerbates the problem.

So it's quite possible that the Index could drop still further. But you can be sure of one thing. It is not going to fall to zero.

In fact, we have to be getting close to the bottom. The average Nasdaq bear market has lasted 10 months and we're past that now. Apart from the 1973-74 drop, the longest Nasdaq bear has been 15 months. So unless we're about to see a market slump that rivals that of the Great Depression, which I do not expect, we can expect to see Nasdaq bottom out and begin the long climb back sometime this year.

Don't expect it to snap back like a rubber band. It may be three to five years before we see 5000 again. However, there will be profits to be made on the way up.

So the time is coming when investors should gradually begin to build new positions. I don't believe it is here yet. But it's not far off. We'll keep you posted.

IWB stocks do well in tough markets

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  The experts have been saying for months that this has become a stock-pickers' market. Although the broad indexes have been plunging, there is still good money to be made if you know where to look.

The Internet Wealth Builder newsletter has been proving the point recently. Many of its selections have performed extremely well for members, especially in these tough times. Special credit for our success goes to our two contributing editors, veteran market analyst Tom Slee, and Irwin Michael, one of Canada's top value investors and president of the ABC Group of Funds.

Not every selection has been a winner, but we believe our track record is among the best in the business. Take a look:

Luscar 10% Convertible Debentures. Recommended March 13, 2000 by contributing editor Tom Slee at $72.50. Sold Feb. 26, 2001 at $103.60. Gain, including interest received: 57%.

National Bank. Recommended Aug. 9, 1999 by Tom Slee at $18.25. Sold Aug. 21, 2000 at $22.85. Gain: 29.3%.

BioChem Pharma. Recommended Aug. 14, 2000 by Tom Slee at $31. Sold Jan. 29, 2001 at $51.30. Gain: 65%.

Alcan. Recommended Oct. 4, 1999 by Tom Slee at $46. Closing price March 9, 2001: $59.50. Gain to date: 13.5%.

Celestica. Recommended April 29, 1999 by Tom Slee at $25. Took half profits Dec. 20, 1999 at $68.10 for a gain of 172.4%. Closing price March 9, 2001: $68.05. Gain on balance: 172.2%

CN Rail. Recommended Jan. 10, 2000 by Tom Slee at $37.95. Closing price March 9, 2001: $56.90. Gain to date: 49.9%.

Enbridge. Recommended Aug. 23, 1999 by Tom Slee at $32. Closing price March 9, 2001: $40.89. Gain to date: 27.8%.

Manulife Financial. Recommended Aug. 21, 2000 by Tom Slee at $28.40. Closed March 9, 2001 at $42.35. Gain to date: 49.1%.

PrimeWest Energy Trust. Recommended Oct. 26, 1999 by Tom Slee at $7.05. Closed March 9, 2001 at $9.25. Gain to date, including distributions: 54.9%.

Talisman Energy. Recommended Sept. 13, 1999 by Tom Slee at $49. Closed March 9, 2001 at $63.52, Gain to date: 29.6%.

Norske Skog. Recommended Aug. 8, 2000 by contributing editor Irwin Michael at $16.25. Sold March 8, 2001 at $19. Gain: 16.9%.

Gulf Canada Resources. Recommended Nov. 13, 2000 by Irwin Michael at $7. Closed March 9, 2001 at $8.65. Gain to date: 23.6%.

Surrey Metro Savings. Recommended Oct. 2, 2000 by Irwin Michael at $12.20. Closed March 9, 2001 at $14.65. Gain to date: 20.1%.

Research in Motion. Recommended on three occasions by Gordon Pape, started April 10, 2000, at an average price of $82.20. Sold Oct. 2, 2000 at $149. Gain: 81.7%.

Mackenzie Financial Corporation. Recommended March 8, 1999 by Gordon Pape at $17.75. Sold Dec. 4, 2000 at $27.35. Gain: 54%.

The Walt Disney Company. Recommended Aug. 9, 1999 by Gordon Pape at US$25.50. Sold Aug. 14, 2000 at US$40.63. Gain: 60.2%.

Norwall Group. Recommended Jan. 11, 1999 by Gordon Pape at $1.90. Sold May 29, 2000 at $3.25. Gain: 71%.

Canadian Utilities. Recommended May 1, 2000 by Gordon Pape at $37.75. Took half profits at $49.75 on Jan. 8, 2001 for a gain of 31.8%, not including dividends. Closed March 9, 2001 at $53.50. Gain to date on balance: 41.7%, not including dividends.

Petro-Canada. Recommended July 19, 1999 by Gordon Pape at $21.95. Closed March 9, 2001 at $37.13. Gain to date: 69.2%.

Canadian Oil Sands Trust. Recommended Dec. 8, 1997 by Gordon Pape at $25.25. Closed March 9, 2001 at $37.50. Gain to date including distributions: 70%.

For information on how to become a member of the IWB: CLICK HERE.

Questions and Answers

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  Should you consider the current unit price of a fund when making a purchase decision? For the answer go to Our Q & A Page.

Tell Your Friends

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Special offer: Six Steps to $1 Million

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  A reminder that you can still get a first edition copy of my forthcoming new book at a special pre-publication price of 25% off!

Six Steps to $1 Million will be published in May. The book sets down a formula for achieving personal wealth that everyone can follow.

In six clearly defined steps, it shows readers how to progress from idle dreams to genuine riches. Whether you're a budding entrepreneur or hope to build your nest-egg through careful saving, this book tell you exactly how to proceed.

Perhaps even more important, the book explains how to enjoy your success to the fullest once you've reached your goals. It reflects my philosophy that life is much more than money, but the money makes it much more satisfying.

I believe you'll find yourself referring to this practical and inspirational book over and over in the years to come. And I think it will also be a book you will want your children and your grandchildren to read for its enriching themes.

Six Steps to $1 Million will be published in hard cover by Prentice Hall Canada at $34.95. But you can order a first edition now at a special pre-publication price of $26.22 (a 25% discount) plus shipping and taxes for delivery as soon as it's off the press. Order extra copies for gifts and save the shipping charges on all additional books sent to the same address.

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