Ken:
"...Madness of Crowds" is a classic, to be sure, but not a very practical investing guide, as you might only see one or two of those instances -- if any -- over the course of an investing lifetime.
I would recommend to you instead Malkiel's "A Random Walk Down Wall Street," which demonstrates to a fair degree of academic certainty that the sum total of investor opinion in the market does decent job of weighing all that is known about a company, and putting a price on those potential risks and rewards. Movements from those prices tend to stem from things no investor could have known in an earlier time period. The consistent ability of market indexes to beat most funds' performance is in part a product of this difficulty in gaining an edge in stock picking against the market.
It's a lot like a knowledgeable bookie setting the spread on a weekend's worth of football games. How maddening is it that you know who is likely to win most of the games, then have to agonize over the question of how much they will win by. There goes your money as winning teams are still losers to the spread, or you get teased into picking a few underdogs who never had a prayer. Stocks work the same way: No one is asking you the easy question of whether you think Coke, Intel or Microsoft are good companies. They want to know if you thnk what you think they really are two touchdowns better than some other company.
Now go back to my first posts on this thread last September, starting at about #160. You'll see that I got in mainly on the contrarian play. The stock had fallen substantially. Yet, instead of settling into an equilibrium in which its new lower price was a good fit with the risks and rewards investors saw, this stock was growing into increasing disfavor each day as it fell further.
While I endorse Malkiel's work in general, clearly it is foolish to apply it literally when a stock moves over a wide range of prices in the course of a year or a few months. Then it is unlikely that investors each and every day managed to set the right price. Probably they were overreacting to some short-term news, or the excitement or frustration that can drive sentiment on a stock to an extreme.
While the stock languished in the 20s and 30s last year, I continued to post from time to time, pointing out how old news and old problems kept being resurfaced as fresh reasons that AOL should plunge. Expectations got so low for this stock that investors even started assuming one or two management blunders ahead. Not surprisingly (to me, at least, though it seemed to shock and offend many on the thread at the time) we reached a point where some moderate bad news did not cause the stock to go down at all. It even went up some days when new class action lawsuits were filed.
Then AOL started announcing 8- and 9- figure marketing deals and the professional investors realized what was happening and began to buy.
I'm counting on investors overshooting to the upside. I just don't think we're there yet. The recent gains were fairly sudden, and the resistance the stock has shown to the normal urge for profit taking suggests a kind of strength you see more at the early stages of a move.
The @home IPO's $2 billion market cap shows that Wall Street has done the math again and believes that online services can generate tens of billions in subscriber fees, ad revenues and transaction commissions on a whole range of goods and services. That in turn should be able to support profits in the hundreds of millions and perhaps billions for category leaders. Why no panic for AOL at the entry of a new company? Well, @home does not represent a "new" competitive threat, as we've been hearing about them for years. AOL's rise coincident with that IPO shows that most investors don't see it as posing an immediate threat, which is reasonable because the rather mundane work of attracting and servicing millions of customers is often quite a bit harder than it looks. AOL has proven that in spades; @home will no doubt be going through its own version of those travails before it challenges AOL more directly.
Cable modems are neat, but my home computer is near a phone jack not a cable outlet. Also, what if I still need a conventional phone modem to send and receive faxes. No way the majority of consumers will stand for needing two modems. Think, too, about how many people still have 14.4 modems and have not upgraded to 28.8 or 56.6. I think the most recent figures I saw were that 14.4 predominates in the home. People upgrade on a relatively slow scale, so I think @home may be frustrated by its status as a niche player for quite a few years, while AOL will not suffer that limitation.
Another reason to believe we have not yet run through the full gamut of investor sentiment to extreme overenthusiasm is that this is all happening against a backdrop of the early and powerful stages of the growth curves for overall online usage, not to mention the advertising and marketing deals that are key to any service's business model. It is foolish to try to guess where the end is for a trend that is just beginning to develop, sort of like trying to guess the World Series winner 10 days into a baseball season.
Finally, I do agree that the relatively unimpressive volume on the move up needs to be watched. It could be the July vacation effect. It could also be that many fund managers don't trust AOL enough to make more than a token move until they see the next set of financial numbers. |
