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Technology Stocks : America On-Line (AOL)
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To: Vendit™ who wrote (6224)3/7/1999 4:07:00 PM
From: Manish Aurora  Read Replies (2) of 41369
 
Several things about the Individual Investor article:

1 I agree that analysis should be forward looking. It does not matter what AOL was selling for yesterday. Is it going to perform for what you pay today. That is the thrust of most of the article. It also deals with taking the high probability bet of a buying a good franchise and accepting lower returns rather than the low probability bet of a dark horse that might be the 'next AOL'. The simple truth is most people do not have the training or the time. Fair enough.
2 I disagree that buying the Nifty Fifty was a good bet. The pain of loss is 3x the pleasure of gain. Watching you holdings going down was not sustainable. Any risk neutral human being has loss limits. A risk averse human being would have gotten out and not come back in for a long time. These sort of analyses are easy to make 25 years after the fact.
3 If company X is a great company, are you willing to pay Infinity? *Your* returns would be ZERO. So if you haven't asked yourself what the firm is worth, why are you buying? Maybe it is worth that huge multiple, maybe it is not. But if you do not think about valuation, your action is unforgivable even if ex-post you happen to make money in that instance. Over time, you are setting yourself up. And yes, entire markets have been known to do that repeatedly.

Manish Aurora
www.rationalinvesting.com
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