Thursday, June 7, 2007

Nortel and TSX Comp Index - The Impact

One of the things I think I have learned about how the stock market works, is that individual stocks can do extremely well for a period of time, then crash and burn, with little hope of ever recovering their former peak price. For this reason, investing (betting) on individual stocks is a real crap shoot. In seems that betting on the market index to always comes back and exceeds it's former peak a much safer and profitable bet.

What happened to Nortel and the TSX Comp Index is an extreme example of this important aspect of how the market works. According to a back issue of "Money Saver", Nortel accounted for about 33 percent of the TSX Comp Index when the Tech Bubble Peaked. That's a lot!

Nortel achieved a peak price of $120 in late 2000 as part of the Tech Bubble that took the TSX Comp Index to a high of ~11,500. The Tech Bubble burst, Nortel fell to $0.75 and the TSX fell to ~5,800.

Since then, Nortel has recovered to ~$27 but the TSX Comp Index has surpassed the "Tech Bubble Peak" and is now at ~13,800. Today, 6 years later, Nortel has recovered to only 23 percent of it's former peak price. In contrast, the TSX Comp Index has recovered completely, and has exceeded it's former peak and is currently at 120 percent of it's peak level.

More and more, I have come to agree with those who believe that chasing the next hot individual stock is a fool's errand.

Chart Links:
TSX Comp Index 10 Year History
Nortel 10 Year History

PS...Now that "boating season" has started my posts will be less frequent.


dcollette0106 said...

I believe Nortel had a 1 for 10 split this winter so there $27 was $2.70 last December allot less than $120.00(I think they had other negative splits in 2001 2002 also)

Canadian Money said...

Good point. I checked and the last split was a 1:10, new for old, (reverse split)in December 2006.

I wonder...does a reverse split help the index recover faster?