Ganesh: thanks for your comments.
I think that one of the greatest problems that we have seen in the market this year that has caused many "smart" investors to lose money can be described as follows (I have no data to back up this theory - this is based on personal experience and on pure speculation on my part):
Prior to 1999, many traditional buy-and-hold investors were investing in what might be considered low-risk long-term plays (including the big techs, such as MSFT or INTC and the Dogs of the DOW). These buy-and-hold investors saw other investors who were playing the internet stocks make bundles of money. At the same time, the buy-and-hold investors sat and watched CNBC as investment banking analysts (such as Blodget and Meeker) made very optimistic claims about i-net stock price growth - with very high price targets (YHOO 300, AOL 200, AMZN 240 pre-split). Buy-and-hold investors evaluated the analysis of these analysts and said to themselves "You know this doesn't make a lot of sense - but these analysts are from respected firms such as DLJ or ML, so they must be honest and they must know what they are talking about."
And so some of these buy-and-hold investors bought the story and started buying internet stocks in order to realize some of the fantastic profits others were making. Those buy-and-hold investors who were unlucky in their timing bought the i-nets in March of this year - or even in July. When the i-nets took precipitous drops, these buy-and-hold investors faced a grave decision: sell and cut losses, or revert back to the traditional investment model that worked in the past - namely, hold and wait. Those that bought in late March or early April and held have lost a lot of money - even on the big name i-nets. Some of the big name i-nets may actually come back to their April highs -but then again, they may not. But the second tier i-nets probably never will come back to their highs.
And so we have a situation where many "smart" investors employed an investment model (buy and hold) that worked so well in the past, to a category of stocks to which the model may not apply. Why doesn't the model apply? In my view, it is due to a sort of "collusion" that is occurring among some investment banks, VC firms and some i-net firms - I'm not saying this is a conspiracy per se (please don't start the bomb-shelter comments), but the phenomenon is rather due to a group of firms taking advantage of what they see as a very good money making opportunity - one could say that participants are "colluding unknowingly or without the intention of actually doing so". The collusion results in a situation where participants share the pre-IPO shares of the i-net firm, and the investment bank promises to "pump" the stock post-IPO with overly optimistic forecasts of the prospects of the i-net company - and the IPO price as well as the number of shares offered are set unrealistically low. With this scenario, the traditional primary purpose of the IPO has undergone a transformation - the IPO is no longer a primary tool to raise capital for a new company, rather it is a vehicle to make money for the VC firms, the investment banks and the i-net insiders.
The impact of the above scenario has been amplified due to two factors that have resulted from the internet itself: (1) greater and faster dissemination of information (an analyst upgrade is distributed at lightening speed, and the message boards server to build momentum); (2) online trading (where day-traders and short-term traders have introduced greater volatility in the market).
Previoiusly, buy-and-hold investors were not aware that any such game was going on - or that any such game was even possible. But now many investors are starting to realize what is happening - again the internet has helped here through the dissemination of information of how investment banks do their business. Buy-and-hold investors are now doing one of two things: (1) starting to play into the game, and attempting to trade the i-nets (and other hot stocks); (2) dropping out, and selling their i-nets at a loss.
I classify myself as one of those traditional buy-and-hold investors that this year changed strategy to try to capitalize on the run-ups in internet stocks (and I admit I was motivated by greed). I did this in late March early April of this year - and sustained some good losses on AOL and YHOO. By May, I had sold. And I've abandoned buy-and-hold as a strategy and am now trading instead (and holding mostly cash). I know many others who have undergone this same transformation. And I know some buy-and-hold investors that bought internet stocks earlier this year - and held - and are sitting on huge losses. These are smart people - many of who were following the advice of other people that they thought were smart (such as Meeker and Blodget).
So in summary, many smart buy-and-hold investors have been "fooled" this year - and through being fooled, have lost a lot of money. Some of these investors continue to be fooled. While others have gotten out and are waiting on the sidelines to see if the game will collapse on itself. It really comes down to whether our markets are more like a casino, or a mechanism for raising capital for companies that have viable business prospects. I think we're looking at a casino at the moment. And buy-and-hold just doesn't work at a casino.
Thanks,
-Eric |
