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NASDAQ's plummet teaches money lessons

Beware whenever the Fed raises short-term rates

About $2.7 trillion in overall value has evaporated from the NASDAQ index since it reached its all-time peak on March 10, 2000.

Formerly high-flying dot-coms now sell at 90 percent below their peaks, while many NASDAQ luminaries — Cisco Systems, Intel and Microsoft, to name a few — have sunk by 50 percent or more.

Since those who don't remember the past are condemned to repeat it, here is our take on some lessons from the NASDAQ's fall.

First, don't fight the Fed. When the Federal Reserve Board raises short-term interest rates, stockholders must beware.

To ward off inflation, the Fed boosted rates one-fourth point on June 30, 1999, which made it more expensive for companies to borrow money. The Fed's move didn't tank tech stocks immediately. But it was the first of six hikes that would boost rates nearly two percentage points by last May.

It was just a matter of time before higher interest rates and slowing growth started to drag down share prices.

Bigger tech companies stopped borrowing money for capital investments, which hurt sales in all the companies below them on the food chain. Once sales started to slow, stocks fell.

Second, share price doesn't matter — as long as everything else is perfect. The price of a stock should have some grounding in a company's underlying value or its current earnings and growth potential.

The problem is when companies grow so rapidly that investors have trouble figuring out how much they're worth. The dot-com bubble burst once investors concluded that many companies would run out of cash before they ever made money.

Surprisingly, though, many of the blue-chip tech stocks held up for months after the NASDAQ peaked. A share of Intel, the world's biggest chipmaker, sold for $60 on March 10, 2000, or at 57 times its previous year's earnings, even though analysts considered it to have uneven profit growth.

Investors were essentially saying that Intel could grow fast enough or consistently enough to justify its P/E.

Intel slumped in the spring with other tech stocks, but it rallied over the summer and hit an all-time high of $75 in late August. In mid-September, Intel disclosed that third-quarter sales would fall shy of forecasts. The stock got shorn 22 percent.

Eventually, it sank to $30 a share.

Obviously, investors were willing to pay up for Intel's stock when they thought the company's outlook was bright. But when clouds began appearing, investors quickly remembered that price does matter.