Tech That, Peter

By Daniel Kadlec

The brass at Fidelity will cry foul, as may the entire mutual-fund industry, which is in sore need of a new superstar. But here goes, anyway: Give it up, Peter Lynch. This stuff about never having worked on a computer and wanting little to do with technology stocks is stale. Very stale. You've got good company in Warren Buffett, another totemic technophobe. And I'm not saying to load up exclusively on tech stocks. But it's plain silly to encourage plain folks to avoid them. They're not that difficult to understand. If you can figure out Maytag, you can handle Dell.

Whew! Any incoming? Taking on Lynch and Buffett at their own game is perilous sport. They're the nearest thing to omniscience Wall Street has to offer. But I've been thinking a lot about both men's no-tech dogma since last spring. That's when Buffett told thousands at Berkshire Hathaway's annual meeting cum Buffettfest that he won't buy tech stocks because he doesn't know how to value them, and Lynch glibly confessed to thousands more at a fund-industry conference that he doesn't know how to turn on a computer. Lynch's point, as ever a good one, was that you shouldn't own what you don't understand--most things tech, in his case.

But some things are worth knowing. The tech-laden NASDAQ index is up 50% this year. That's right, 50%, and it's not all that unusual. In successive years since the last recession (1991), the NASDAQ has risen 56.8%, 15.5%, 14.7%, fallen 3.2%, risen 39.9%, 22.7%, 21.6% and 39.6%. It has beaten the Standard & Poor's 500 six of the past nine years (including this one).

Technology isn't weird science; it's everyday life. It's e-mail. It's the government wanting to bust up Microsoft, Y2K threatening the globe, the Internet challenging the mall. Ignore it? O.K. But then forget about beating the market, and go buy an index fund. Really. You'd get a market weighting in tech stocks (24% of the S&P 500) along with low expenses and tax-efficient management. That's a great deal.

If you're trying to do better, though, tech stocks are critical. Of 1,958 diversified stock funds, 673 were beating the S&P 500 through October. Only 16 of them have less than 5% in tech stocks, Morningstar reports. Since 1992 only 1 in 5 diversified funds that beat the market each year did so without a slug (at least 5%) in tech.

Sure, they can be confusing--just what does Cisco do?--and volatile and pricey. But even strict-value managers, who focus on low stock prices relative to earnings, buy them. "Get your head out of the sand," Scott Black at Delphi Management advises tech sissies. Look for normal stuff--little debt, market dominance, sustainable advantage, strong brand, good managers, a commitment to research and development. You can find tech companies priced right. Black's favorites include electronics suppliers Arrow and Nu Horizons.

To be fair to Lynch, when I told him I wanted to hammer him, he readily agreed that people who understand tech companies absolutely should consider the stocks. His problem is with the hordes that buy a tech stock "just because this sucker is going up," and the flawed thinking that most tech companies will eventually earn tons of profit just because they're in a transforming industry. He's right, of course. Momentum shifts and intense competition can drain profits or kill any enterprise. PC makers are feeling that bite now. But should you really take a pass without having a look? That's taking Lynch and Buffett too far.

See time.com/personal for more on tech stocks. E-mail Dan at kadlec@time.com See him Tuesdays on CNNfn at 12:45 p.m. E.T.