Qualcomm (qcom) was the darling of the 2000 tech bubble. The story of QCOM’s stock rocketing to all time highs in an incredible short time frame in the late nineties and 2000s. Then in about a year it lost half its value and then within two years almost three quarters of its rapid increase was gone.
At the peak of the 2000s you would have considered yourself lucky to have an investment in the company, yet years later you would be licking your wounds. It is now 2020 and the stock has finally broken it’s all time high of the 2000s as seen by the chart below. The red line on the chart is the high of the 2000s. Twenty years later is a long time to wait if you invested at the incorrect time.
In the late nineties I went to a presentation put on by QCOM in San Diego where Irwin Jacobs (the then acting CEO and founder) spoke about the company and its technology. I left the event realizing that QCOM’s patented technology was going to change the cell phone data business. QCOM’s digital technology had a much broader application and would allow for more data at faster speeds to occur over the airwaves.
As an investor going through such situations you not only watch the company’s stock climb, but you also get caught up in the emotional aspect of watching your small investment turn into a rather large investment. Many of the emotional biases take over, such as confirmation bias, where you start to rationalize that you made a good decision that will last. Unfortunately, the markets don’t always act rationally and see things your way as was in this case.
The Story of QCOM Lesson
There is a lesson in this investment story. When events such as this one occur it only reaffirms that having the proper skill set in investing and value knowledge are the only way to make the most of investments including ones that grow fast. Clearly, knowing how to value a business within its market place adds to an investors ability to capture gains when needed. As in QCOM’s case the market was assigning a very high multiple to the stock in the 2000s. Not understanding that Qualcomm’s high price may not be sustainable takes practice and a rules based trigger to act in order to benefit from the unexpected.
Here are some points to consider:
- If you are going to be an individual stock investor choosing specific businesses that you like, make sure you know how to determine the value of that business in some way that will tell you if you are benefiting from an overlooked gem or paying too much for a glamour tin can. In order to build wealth you need to be able to increase your stock ownership position size within the businesses you like without getting crushed.
- If this sounds like too much work then choosing an index based strategy or a stock strategy that changes out the portfolio annually can be a good way to go as long as they are back tested. Remember here that certain strategies will play out during different times over different years for various reasons. As an example sometimes value stocks don’t perform well for a number of years due to a growing trend or industry. Eventually, things do change, but you have to be able to trust your strategy, and be a long term investor.
Remember the more you can mitigate emotional decisions and incorporate a rules based decision process the easier it will be to act when it feels scary.