Brave That Storm

Like many novice investors last year, Cerstin Stadeler started off with a flash. An advertising executive in Bonn, Stadeler, 35, put her savings into the shares of an online advertising agency. She cheered as the stock increased in value sixfold in a matter of months, making her nearly $450,000 richer. But in March, the market began to collapse, reducing Stadeler's shares to less than she originally paid for them. "A lot of people started buying stock because they thought they were going to get rich," she recalls. "If only we had sold."She has a lot of company these days. Across Europe, thousands of first-time investors especially those who put their money into technology companies are learning the hard way that what goes up can also come down, fast. Since March, Germany's technology-heavy Neuer Markt lost 70% of its value, while London's techmark 100 index has fallen by more than half. "Panik!" screamed a banner headline in Germany's mass circulation Bild newspaper as shares in EM.TV, a children's television distributor and owner of the Muppets, skidded from $110 a share to just $7.

Despite the scary headlines, individual investors have, somewhat surprisingly, kept their cool. "Most equity investors have not lost their faith in stocks," says Norbert Walther, chief economist at Deutsche Bank. "What developed was not an equity culture but a greed culture, and that has clearly corrected."

Figures from late last year showed money was still flowing into virtually all of Europe's markets, although at diminished rates. "Despite the dramatic disinvestment from new technology, we've in no way seen a massive withdrawal from European equity markets," says Nicolas Gronier, market strategist at CDC Bourse brokers in Paris. Net retail sales of tech funds in Britain hit a high-water mark of $1.02 billion last March; in October the outflow was just $109 million.

To a large extent, Europe's technology, media and telecom shares, the once mighty tmt segment of the market, slumped in line with America's tech-heavy nasdaq, which lost half its value in 2000. The 11 tmt stocks in France's main cac 40 index including France Telecom and Thomson Multimedia declined 33% since September. One reason for the sell-off was market fright at the vast sums most operators were borrowing to finance third-generation mobile phone licenses. "We're nearing the pain threshold," Gerhard Schmid, head of Germany's Mobilcom, said of his company's plummeting share price. He warned that the firm may switch from the Neuer Markt to the more traditional Frankfurt exchange to escape the drumbeat of bad news.

That tattoo has been heard across Europe. The Continent's high-tech shares had been inflated by an Internet bubble just like America's. But the U.S. bubble had been inflating for almost a decade, giving some investors the opportunity to take profits and rebalance portfolios. In Europe, the entire process lasted only months, leaving many neophyte traders high and dry.

Some of last year's biggest gainers were shares in Internet brokerage companies, firms offering discount transactions through online accounts. "Headwinds from falling markets have significantly slowed the march of online brokers," says Huw van Steenis, an analyst at J.P. Morgan in London. "It's fair to say a good deal of retail investors are under water." And they took the market capitalization of those online brokers down with them. Consider the case of Consors, Germany's second-largest discount broker, which went public in April 1999 at $31 a share, saw the price rocket to $153 and then fall by more than half. "We are probably the most active on the Neuer Markt, so our customers were hit a little bit more," said Alfred Meckel, CEO of Consors Investment Bank. "Customers were significantly less active in the fourth quarter."

In Britain, which has more shareholders than any of its European neighbors, technology mutual funds declined by 26% in net asset value last year, according to fund tracker Lipper. "With tech funds we have gone from excessive optimism to pervasive pessimism," says Steve Lipper, the firm's global marketing director. Deborah Choate, a Paris-based finance director of Wavecom, a producer of mobile communications modules that has seen its share price drop from $138 to $78, agrees that sentiment is now too negative. Despite the dismal showing, most investors have stood firm. "There is more patience than panic," says Anne McMeehan, spokeswoman for the Association of Unit Trusts and Investment Funds. "People think the only way to get back losses is to stay the course."

An exemplar of that stoicism is Sheila Bence, a retiree in Plymouth on England's southwest coast. She and her husband Desmond retain an abiding faith in equities, she says, even though they were hit "fairly hard" by the market fall. "We'll ride out the storm. I'm 77, so I've been through a few before."

Although tech stocks bore the brunt of the fall, Old Economy shares weren't entirely spared. In Germany, many financial advisers warned investors to stay clear of Internet stocks and instead invest in establishment firms like DaimlerChrysler, the auto manufacturer. That turned out to be a bad call. DaimlerChrysler shares peaked at $67.74 and now trade around $43.

In spite of the tumult, financial advisers are generally telling their clients to continue holding steady. After all, investors still have children to put through school and pensions to supplement once they retire, and such obligations require a long-term outlook. "Investment funds are stuffed with money waiting to take another turn," says Karl Homburg, an analyst at Bankgesellschaft Berlin. Even Stadeler, the German ad exec, says she won't sell her loss-making shares. And if they start going up, she just may buy more.

With reporting by Bruce Crumley/Paris, Thomas K. Grose/London and Steve Zwick/Cologne