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Post: : This tech investor worked during the dot-com boom and bust — this is what he’s thinking about the stock market now

Talk about a rough ride for tech investors!

The Nasdaq

has fallen more than 15% from its November peak, and nearly half of the stocks in the index have been cut in half. Tech is basically in a stealth bear market.

For insights on how to think about this debacle and whether — or what — to buy or sell, I recently caught up with Matt Moberg, who helps manage the Franklin DynaTech Fund
We could do worse than check in with this manager, who crushes the competition.

During the past three to five years, the fund has outperformed its large-cap growth category and index by anywhere from 17 to 21.3 percentage points annualized, according to Morningstar Direct. That’s some rare outperformance in a managed fund world where more than half of managers regularly lag behind. The fund is big, with over $24 billion under management. It charges a relatively low 0.79% fee.

Founded in Silicon Valley in 1968, the fund has invested in innovative companies for longer than millennials have been alive. Moberg joined in 2004 and he became the lead manager in 2009. He’s been a tech analyst since the latter days of the late-1990s tech bubble. The “dynatech” in the fund name is short for “dynamic technologies.”

Matt Moberg of the Franklin DynaTech Fund.

Here are five key lessons on how to perform well in the market, and what to think right now about nagging topics like the tech rout, inflation, and the lasting impact of Covid on the economy and investing.

Lesson #1: Invest in innovation

Innovation trends are often long-wave events that last for a decade or more. So, if you catch the right stocks, it can be a good ride.

“We look for companies that have durable growth that will go far into the future,” says Moberg. “We want to consistently outperform the market by investing in innovation.”

One thing that can really help in this effort is recognizing when an external shock permanently changes part of the economy. These are big events like the oil shock in the 1970s, or the advent of the internet in the 1990s.

“These big external shocks can change adoption rates of innovation and technology permanently,” says Moberg. If so, you have an interesting long-term trend to invest in.

Moberg thinks we just witnessed one of these external shocks in Covid-19. The permanent change? Ecommerce saw a big acceleration due to Covid — and its growth is going to continue. That makes ecommerce names in his portfolio look even more attractive, especially in the current selloffs.

A look through his holdings shows that ecommerce-related names he likes include the obvious one, Amazon.com
but also Shopify

and MercadoLibre

But what about their current weakness? Is something wrong with these companies? More likely, investors got used to the big acceleration in sales due to Covid, so the cooling phase for their growth now has turn sentiment against them.

“These companies are still growing and adding to their market dominance,” he says. “They are still growing on top of fabulous Covid comparisons. That implies the change those companies have experienced has been permanent, which is what we look for.”

Lesson #2: Consider innovation leaders

Another big reason these stocks are down is the high level of inflation. This has investors worried about excessive interest rate increases by the Federal Reserve. Higher rates are a risk to growth stocks because they can cause a recession. But history shows the economy and the stock market typically continue to be strong for most of the time the Fed is in rate-increase mode.

The risk of higher interest rates also hurts growth stocks because this reduces the worth of future earnings in valuation models. By definition, a lot of the earnings growth in innovation names is far in the distant future.

But like me, for what that’s worth, Moberg thinks inflation will be temporary, and cool by the end of the year. This isn’t exactly consensus. Both Bank of America and Morgan Stanley were recently projecting inflation at 7%-8% or so at the end of 2022.

Moberg thinks wage pressures may ease as people continue to return to the workforce, reversing “the great resignation.” He notes that technology is inherently deflationary. Supply chain issues will get resolved. Even if inflation comes down but remains well above 2% by the end of the year, if investors have clarity on where it’s going, that will calm nerves.

“We are at a period of uncertainty, and the market does not like uncertainty,” he says.

More clarity is likely, as the above trends rein in inflation.

“No matter what happens, we will have much more certainty around the inflation number. Even if it is high and we know that, that is better than uncertainty. If six months from now we have clarity on inflation, that will help growth companies.”

Lesson #3: Don’t worry about valuation warnings

Valuation matters. But high-growth, innovative companies are always described as “overvalued.” So, you can’t let that stop you from buying them.

“Amazon has been an expensive stock since I started covering it in 1999,” says Moberg.

One reason people misprice tech companies (by assuming they are overvalued), is that they don’t understand their turbocharged growth will last for a long time — a decade or more.

Besides Amazon.com, he cites Netflix

and Tesla

as examples of companies that have been misunderstood, but ended up creating tremendous value for investors over time. He puts his top five holdings in this misunderstood and undervalued camp, right now. The top five holdings are Amazon, Microsoft

and ServiceNow

Consider Amazon.com. What are investors getting wrong here, by thinking it is overvalued? Besides the sheer potential size of ecommerce in the retail space, investors misunderstand the value of a recent investment.

“Amazon has spent the last two years massively investing in one-day delivery, and they will soon start to show profitability from that,” says Moberg. Amazon has a history of making big investments for the long term that take a while to prove out.

He thinks Amazon’s ad business is misunderstood. The key here is advertising on Amazon helps vendors get ads in front of buyers at the crucial point of purchase. This means sellers can better gauge the effectiveness of their ad spend.

“The only other company that does this is Google,” says Moberg.

Facebook and Google generate around $32 billion and $61 billion a year from advertising. Amazon is at just under $10 billion. This suggests the ad business has a lot of room to grow. Likewise, Moberg thinks investors underestimate the growth potential for Amazon’s highly profitable AWS business.

Lesson #4: Average in, but not down

Moberg’s fund doesn’t buy positions all at once.

“We start small and add to them over time,” he says. “If the growth is durable, then we have time on our side and we don’t need to rush because the business will compound for 10 or 15 years.”

This is a good lesson for individual investors who may be averse to averaging up — or adding to a stock on strength after the first purchase, because of a sense of regret.

In contrast, his fund is not big on averaging down, another tactic a lot of investors favor. Innovators have to keep showing signs of progress or they are out. The ongoing “wellness check” is especially important right now, when declining stock prices suggest that tech companies have serious problems.

“There are periods when companies do exactly what we thought and the fundamentals of business are good. But because of market dynamics, the stock is off. We are going through that time now,” says Moberg.

Two examples of selloffs that don’t make sense because the companies are holding their own on performance: Tesla and Idexx Laboratories
which sells diagnostic and monitoring products used in animal care. At Tesla, demand remains strong, and the company will figure out how to meet robust demand despite supply chain issues. Idexx continues to post strong sales growth in its various business segments.

Lesson #5: Think long term, so you can stomach volatility

The recent sharp decline in the shares of innovative companies is just par for the course for these names. Get used to it, if you enter this space or buy his fund. While the fund outperforms over time, it has a history of big ups and downs in its annual percentile rank at Morningstar.

The lesson here is you have to think long term when getting exposure to innovators either via this fund or on your own. The basic rule of investing is never put money into stocks that you may need for expenses over the next five years.

“We would not advise to invest in our fund as a cash account,” he says.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN, ADYEY, SE, MELI, NFLX, TSLA, MSFT and GOOGL. Brush has suggested AMZN, MSFT, NVDA, GOOGL, NOW, NFLX and TSLA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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