How to Play the Coming Tech Bubble

Instead of chasing the latest IPO, stick to indexing.

Mitch Tuchman

There must be a gland in the body that doctors have never found. But we know it's there. We call it the "greed gland." Greed glands were on fire last week when LinkedIn went public.

Maybe this was your mental ticker tape: "How could I have gotten in on that action? Why did I miss LinkedIn and now Yandex? How about all those Silicon Valley geeks getting rich again and I'm not? Are new social networking companies going to become another tech bubble, and will I profit from it? Am I going to just sit on my hands? Maybe I'll just buy LinkedIn now at $90. It's a good company. I use it. It will eventually go higher."

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That's the greed gland talking. There's no doubt that LinkedIn is a fantastic business. This professional network has more than 90 million members and will soon have revenues of $400 million. It has a model with all of the wonderful characteristics of a web-based business. But it is likely not worth anywhere near $9 billion today. Fortunes have been lost buying great businesses at the wrong price. Fortunes have been made buying bad businesses at great discounts. (Warren Buffett called it "cigar-butt" investing.)

The greed gland and its secretion of envy will drive you to buy when you feel you are being left behind. Those who fall prey to it become speculators.

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When you invest or loan your money to companies that operate in our capitalistic system, you as an owner will be paid. Over the time period that retirement investors care about, say 20 or so years, that return has been in the 8 to 10 percent range. Think of capitalism as a train. If you get on it, your money will grow just because the system demands a return on invested capital. On the journey, the train will slow down, backtrack, or speed up, but it will keep chugging along. In 1993, you could have bought the S&P 500 in a newly minted product called SPDR S&P 500 (symbol SPY), the first exchange-traded fund, for $33. Today SPY is worth four times that. You'd have made no decisions, clipped some dividends, and paid minimal taxes without breaking a sweat.

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If you get off the train, you become a speculator, thinking you can get farther than the rest of us who are on the train. Speculating is thrilling, and it cures the temporary itch of the greed gland, but there are two problems that few overcome. First, you pay taxes on the gains, so your winnings are automatically cut by one third to one half. You have to run even harder and faster. And second, all speculators make mistakes. Few investors like to talk about investment mistakes, but everyone makes them. Every seasoned professional investor knows that avoiding and limiting the inevitable mistake is the single most important characteristic of investment success.

If you think you can buy LinkedIn and other IPO shares and sprint ahead of the train, you may get a town or two ahead this year. But sooner or later, you will make a mistake. You'll buy too high on an oversized bet, and you'll feel the pain as your losses pile up. Like all speculators, the train will pass you or run over you at some point in the next 10 or 20 years. Your friends will be having fun on the train and you'll be roadkill.

So, just stay on the train, buy yourself a drink, and enjoy the ride.

Mitch Tuchman is CEO and founder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater peace of mind knowing that they are leveraging the best thinking of Nobel Laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.