With sound financial strategies, investors can make money by investing in volatile Internet shares. Donna Block explains
They climb to incredible heights and then crash and burn with deadly speed. They trade at unearthly earnings to price multiples and don’t expect to make a cent for years. They’re the Internet stocks. And no sector on Wall Street will make you rich or leave you penniless as quickly.
Internet fever is the newest stock market contagion. It’s really easy to get excited about these stocks and just as easy to be scared to death of them. But if, as many say, investing is like gambling, then those high- flying Internet stocks could be compared to a high-stakes craps table. The difference between a winning and a losing trade will often be just a roll of the dice.
The question is: are the dot.com stocks too hot to handle or perhaps worth a roll of the dice? If the answer is a roll, here are a few things to think about.
First, stock manias are not a new phenomenon. They have been a recurrent theme in United States and European financial history for centuries. There was a tulip craze in Europe in the 17th century, a supposed radish oil (didn’t know you could get oil from radishes) shortage in England in the 1800s and the infamous radio stock mania in the US during the 1920s. That sector took more than 20 years to recover after the market crashed in 1929. These are some examples of what could be called yesterday’s Internet craze and if history repeats itself … well, enough said.
There are those who are certain that the Internet bubble will burst, those who believe the speculative bubble doesn’t exist and those who concede that the bubble is there but will most likely deflate rather than burst.
Bill Gates, the richest man in the world, is calling the Internet mania a “gold rush” and warns investors of the “monumental risk”. Alan Greenspan, chair of the US Federal Reserve Bank, said the sector was “hyped”, called it a “lottery” and publicly warned investors of the price they may have to pay to play. Moreover, an increasing number of economists are saying that Internet mania could have far-reaching consequences if and when the bubble finally bursts.
“These stocks are owned mostly by momentum investors buying into a hot sector,” they warn, “but the moment the momentum is gone it will be a game of musical chairs,” where nobody wants to be left standing.
However, new dot.com companies are springing up daily and most analysts agree that the Internet will dramatically change the way the people around the world will live, work and play over the next five years.
“Five years from now it is hard to imagine an industry that will be left untransformed by the Internet, except possibly for steel mills,” said Neil Weintraut, a partner with 21st Century Internet Fund. Dow Jones and Company has just instituted a new index devoted to tracking only Internet stocks
So, with warnings taken on board, information at your fingertips and a desire to roll the dice, how do you minimise the inherent risk of trading in Net companies?
Stick to a trading strategy and remember two basic premises: in the US, Internet revenues could reach $1,2-trillion by 2002, and eventually $33-trillion worldwide, according to Internet research firm ActivMedia. Expect share prices to rise accordingly.
More importantly, expect volatility: what else would you expect from an industry that exists only in the ether of a flickering computer screen? Volatility will probably be a constant not only in this sector but in the overall market. Get used to it.
Since no trading strategy is perfect, before you put any money on the table, do a little homework. Explore the Internet sites of the companies you are interested in, e- mail them with any questions you may have regarding the company, their prospects, the share price, the volume (amount of shares trading) and if you can purchase shares directly from the company. Put together a set of rules to guide your trading decisions and put them on paper. Sticking to a written programme is easier than trading by the seat of your pants.
Also look at trading strategies that suit you, the investor. Like anything else, there are different ways of looking at a single issue. There’s the fundamental approach, that looks specifically at key ratios to determine a company’s worth – like price/sales or price/earnings, book value or earnings versus growth. Unfortunately this has never been very useful when looking at Internet stocks because conventional valuations just don’t apply.
Another approach is to use some of your Web-surfing savvy to find companies looking to snatch up the next Internet start-up- usually telecoms, cable companies, television networks or corporate giants.
Or you could try to get in on the ground floor of the newest companies . One of the best ways to do this is by making yourself an expert on the Web. And what better place to do it than the Web itself. But count on it taking hours: there’s so much information out there you could probably drown in it, so stay focused.
If you can’t make up your mind, seek the help of a professional. Many fund managers and traditional and online brokers specialise in Internet issues and will do the legwork for you.
Or you can take the opinion “if you like it, buy it”. Chances are that other people will feel the same way. This strategy actually works pretty well with Net stocks because most people really like the Internet products they use everyday.
Nevertheless, investors have to remember that all good things come to an end. And expectations are high and rising that sooner, rather than later, the Internet bubble will burst.