Another Year: Older and (Hopefully) Wiser

Another year has passed. And it's been another dismal one for the semiconductor and semiconductor equipment industries. Profitability is scarce — or, similar to what I mention in this month's forecast , it has been "nano-sized."

Yes, I believe we are in for another year of nano-sized profits and revenue growth. No doubt there will be companies that do much better than the industry average and there will be those that plummet deeper into the abyss. The great sorting process continues.

As difficult as it may seem, there have been a few benefits to this elongated cycle. We have learned a few things that will help us with our future investment strategies. First, and probably most important, we have learned to view forecasts that extrapolate stock valuations and very good business conditions to "infinity and beyond" with great fear. We fear these projections because when they do not come true they typically end up as total disasters. We've made a vow to fear irrationally exuberant forecasts.

The second item we have learned is that it is not necessary to be the first to invest when there are no signs of fundamental improvement in the business environment. It has become very fashionable for Wall Street analysts, industry forecasting firms and investors to predict when business is going to turn. With companies in the industry telling us that they have "no visibility," one has to wonder why investors feel the need to take on more risk.

I find it easiest to make money during the fat part of a semiconductor industry cycle. The next cycle we have may last a short 18 months like the last one. Even if that is the case, I believe I will have plenty of time to participate, conservatively, in the rising price trend. There's absolutely no need to catch the exact bottom, or catch the exact top.

With these two lessons in mind, along with a few things we have learned about the industry, I have to say that I am cautiously optimistic about next year. I do believe that during the first half of the year the financial markets will be pressured by many of the same dislocations we suffered from this year. The financial problems are pretty obvious and they will not simply disappear overnight.

Hopefully, by the end of next year, most of the dirty laundry will be in the wash.

With the chip and chip equipment companies, it is pretty obvious there is some serious restrategizing taking place. Many of the people I talk to in the industry have now come to grips with the fact that the overall growth rate of the industry is likely to mirror the growth rate of the end electronic equipment market. Of course, growth in the electronic end equipment market is all tied to economic growth, so for a solid recovery to occur in the chip industry, we need economic strength. I'm not holding my breath for a huge break to the upside.

My stock market message for this coming year: Play very, very conservatively. Be more patient than ever. There will be a time, perhaps during the first or second quarter, when no one will want to own a stock related to the semiconductor business.

I can't leave you on a bad note, so allow me to add this: All is not lost. There is good news even if the stocks dump. Typically, the capitulation point takes place right before an upturn in the industry, so be sure to keep some money ready for the opportunity.