Rip out the rearview, focus on market's future

It was years ago when it happened. Because you could only take the test three times in one year, and because Karen had not made it past the written test on her first try, the pressure was on. She had studied the rules of the road over and over and had practiced her driving in the parking lot of a nearby shopping center. She was in the final stage of the test on the one-car-at-a-time closed driving course outside Baltimore when the examiner told her to make a U-turn. She did.

"You just failed the exam," the officer told her.

"Whadda ya mean, I failed? What did I do wrong?"

The officer was curt; "You didn't look in your rearview mirror or over your shoulder to see if another car was coming."

Karen was livid. "If another car was coming it would have been your fault, because there's only supposed to be one car at a time on this course!"

That argument was not accepted, and as Karen, disgruntled and dejected with having flunked the second time, told us what had happened, she asked disdainfully, "Who wants to drive looking through a rearview mirror anyway?"

A lot of investors have done just that. They are looking through the rearview mirror at what worked last year. The incredible run up in price of many of the Net stocks in 1999 has even experienced investors leaping into dot.com this or dot.com that, frequently without knowing anything about the businesses they are in. If it's Internet, it is the wave of the future. It's technology and the sky's the limit.

Don't get me wrong. I am not knocking technology or the power of the Internet. I am simply suggesting that investors not get carried away and place all their eggs in the "new- paradigm" basket. As I discussed last column, earnings do matter, and what an investor pays for earnings should matter. But sometimes inexperience couples with greed to create a buying mania, driving stocks to irrational levels.

Here are a few examples, based on prices earlier this month, and pointed out in the current issues of Fortune magazine:

"America Online is worth more than GM, Ford, and the entire American steel industry combined; Amazon.com is worth more than Sears, Kmart, J.C. Penney, Saks, and Nieman Marcus combined; Red Hat, which markets software you can get for free off the Internet (the Linux operating system), is worth more than British Airways, Japan Airlines, and KLM Royal Dutch Airlines combined."

So what should the serious investor be doing now? First of all, don't waste your time looking back at any disappointments of last year or thinking that simply because an issue or industry or sector did so well in 99 that it will necessarily repeat in 00. As I mentioned last month, look especially at the financials (banks, insurance, and investment firms), homebuilders, energy related (master limited partnerships in gas and propane, oil service companies) and drug and grocery companies.

The current market gyrations are giving investors a great opportunity to own many outstanding companies at very historically low valuations. It isn't necessary to chase last year's hot stocks. And it isn't wise to drive using only a rearview mirror.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West 65806 or by e-mail at sbj@sbj.net.)