Mind over Matter: Techno-crafting

This week my six-week winning steak over the S&P comes to end, albeit on the downside. Here are the numbers for the week:

S&P -0.30%
Worst-known -0.37%
Dow -0.70%
Nasdaq -1.91%

Who is responsible for this aberration? It’s technology stocks. But I’m a sucker for growth so there’s no love lost and I can’t do without them.

There’s a reason technology stocks often have high betas (or volatilities) – sensitivities to market swings: they can give up gains as fast as they earn them. For this reason always have, in addition to small-cap and/or mid-cap tech stocks, large-cap techs like MSFT, Intel or IBM in your portfolio.

These elephants tend to have “blue-chip” (or low) betas that will limit your downside risk when the market tumbles. To illustrate, consider the following table.

Top Five Stocks by Average Weekly Return to Date (RTD) for the past 5 Weeks

Stock	RTD(this week)	Rank	RTD(last week)	Rank
SLV	14.54%	1	13.32%	1
EBAY	7.70%	2	9.15%	2
IGE	7.63%	3	6.52%	3
EEM	6.19%	4	5.95%	5
MSFT	5.74%	5	5.97%	4

The top billings of EBAY and MSFT show they were among the best folio performers when the market soared in October and November. So it pays to hold technology stocks when everything is gravy in the market. However, when things fall apart as they did on Wall Street this week, tech stocks get hit hard because of their high betas.

Now, looking at the table above you might think that MSFT and EBAY, in particular, hung in there through this week’s bloodletting in the equities market but the table above masks their collapse. Here’s a ranking of the change in RTD from last week to this week – in decreasing order of magnitude:

SLV +4.81%
IGE +4.60%
EFA +1.38%
EEM +0.31%
IWR -0.49%
NHP -0.73%
IJR -0.99%
PBW -1.03%
PG -1.34%
MSFT -2.31%
COST -2.54%
ADBE -5.69%
EBAY -6.11%

Obviously tech stocks get slayed big time in market downturns. But notice that MSFT, which is a large-cap tech stock with a beta of 0.79 – the closer to 1 the less sensitive – fares much better than mid-cap techs ADBE (beta 1.81) and EBAY (beta 3.88!).

Were it not for the restrained negative reaction by MSFT my losses this week would’ve been greater since the folio is 15% weighted in the stock. So if you’re growth-oriented but eager to limit the downside not only does it pay to go tech, it pays to go big in tech.