Once again I agree. Do you remember this former high flyer?
>By Roben Farzad
January 26, 2001
Name Your Own Regret
Data from Jan. 28, 2000 through Jan. 25, 2001
Source: DJNR
· Whacked, Really Whacked
I'M NOT ONE to cry over spilled milk when it comes to investing. After all, the stock market is inherently uncertain terrain — where earnings warnings, management departures and accounting snafus can bring down even the bluest of blue chips at the blink of an eye. Those who dabble in stocks do so at their own risk.
I appreciated this full well when I decided in 1999 to plunk down a chunk of my bar mitzvah proceeds on shares of Priceline.com (PCLN), the revolutionary name-your-own-price e-commerce company that, late last year, became one of the ugliest dot-com blowups in the brief history of the Internet bubble.
The story behind that disaster is hardly news, especially for investors who lost money on the Norwalk, Conn.-based company. But I learned some pretty powerful investing lessons from the debacle — lessons that may be helpful to you.
Invest With Your Head
Kicking myself for not having had the guts to follow through on a late-1998 hunch to invest in eBay (EBAY) and Yahoo! (YHOO) — and therefore missing out on a tenfold return in little more than year — I was convinced that Priceline would offer sweet portfolio redemption. The business model seemed brilliant — so compelling that it convinced William Shatner to don his finest toupee for those playfully kitschy TV spots in exchange for stock options.
I recall being amazed at how quickly Priceline seeped into the travel habits of those around me. A former co-worker of mine, for example, was hooked after lowballing his way into a $250 round-trip weekend flight from Miami to San Antonio (including two nights at a Hilton hotel). Forget eBay and its cadre of Pez fanatics — this was going to be the Next Big Thing on the Web.
And travel wasn't the end of it. My move to New York last spring introduced me to the gee-whiz world of Webhouse Club, Priceline's quasi-independent grocery-shopping arm. In the Manhattan supermarket world, of course, an apple costs a buck, Cheerios are $5, and even fifth-tier store-brand cola — the kind that hints of pediatric cough syrup — retails for $1.75. But not with Webhouse, which, as if by magic, offered massive discounts on name-brand products.
My new co-workers — our discriminating Deal of the Week editor included — spent one or two afternoons a week bidding online for all manner of household goods. With a license to buy premium orange juice at $1.99 (often half the sticker price of Manhattan groceries), it took little convincing to get me on the Webhouse bandwagon. Even my usually skeptical editor Robert Hunter marveled at how, by early August, Priceline had assembled a formidable aisle-clearing cult that showed no signs of slowing down: One million registered customers shopping in 7,000 supermarkets in 10 markets, with even more markets and a nifty gasoline service in the offing.
Tantalizing metrics aside, I recall never being able to conceal a wide Cheshire grin every time a cashier lopped several dollars off my total at the corner Food Emporium. The Nasdaq's spring dyspepsia notwithstanding, there was simply no reason for the stock to be trading at a quarter of its March high of $104.25. Sooner or later, I believed, investors would come back to the notoriously volatile stock in droves.
In retrospect, I realize that I was letting my heart run my portfolio. And fatal mistake No. 1 made me a sitting duck for fatal mistakes No. 2, 3, 4 and 5.
Do Your Homework
I agreed whole-heartedly with sell-side analysts' table-pounding praise of Priceline — particularly after the company put the finishing touches on an all-star management team. Vocal backing from the institutional likes of Janus and from savvy tech moguls John Malone and Paul Allen didn't hurt either. The love fest was intoxicating.
Hype aside, a cursory glance at the company's financials only buttressed my convictions. Last January, Priceline swept the Street off its feet by posting a 791% year-over-year revenue surge and setting a 2000 revenue target of $1 billion. As the level of Buy calls and outlandish price targets hit a fever pitch, I lazily started letting analysts do my homework for me. That was fatal mistake No. 2.
Had I bothered to spend a couple of minutes reading between the lines on Yahoo! Finance, I could have (and should have) seen that Priceline's apparently glistening financials included an oh-by-the-way $910.4 million charge for the issuance of warrants to its airline partners — several times the company's $169 million in quarterly revenue. Or how pretty much every major insider — especially management — raced to dump truckloads of the stock almost immediately after that blockbuster earnings report. Or how the very airline partners who were the beneficiaries of Priceline's profligate share program were already conspiring to snuff out their benefactor through their own ventures.
Would've, could've, should've. Instead, I dove headfirst into my third fatal error — giving complete credence to analysts' reports that often downplayed such inconvenient details — details that portended Priceline's imminent downfall. As a product of Wall Street myself, I blew it, pure and simple. Don't get me wrong — sell-side research can be an invaluable quantitative tool when examined dispassionately. But it can also serve as an echo chamber when you're already in love with a company.
Use Common Sense
With the bull pulled over my eyes, I was completely blind to the numerous red flags popping up before me — events and trends whose discovery hardly required fancy analytical techniques. For instance, even as analysts salivated over the hot growth prospects for Priceline's grocery service, every trip to the supermarket last summer left me fully aware of the fact that the Webhouse experience lacked basic financial controls.
Take the case of the wildly popular $1.99 carton of pure premium orange juice. My weekly Webhouse bidding session always delivered that bargain with one stipulation: Florida's Natural brand only. Yet my grocery store — whose regulars were increasingly brandishing Webhouse membership cards — always ran out of Florida's Natural. "No problem," was the response from the cashiers, who let me take the best-selling Tropicana Pure Premium brand instead. Ditto for pretzels and cranberry juice.
Who was picking up the difference? Not me. My Webhouse-linked credit-card statement always reflected the exact total specified in my bidding session, and I was all too happy to ignore the truth. (Priceline finally pulled the plug on the cash-gushing Webhouse Club last Oct. 5, effectively shelving its lofty plans for scalable name-your-own-price e-commerce in order to become a glorified travel agency.)
But even if I never stumbled onto signs of the lax controls at Webhouse, the fact that so many Priceline travel customers were alleging fraud and poor customer service should have sounded a loud alarm in my head — especially for a company whose fortunes were so inextricably tied to its airline, hotel and rental-car businesses. It didn't. So many warnings signs, so little action. For those of you still counting at home, that was error No. 4.
By Christmas, Priceline stock was trading at $1.13, nearly 1/100th of its late-March high.
Buy Low, Sell High (Duh)
Last March, with Priceline at $104 and Internet stocks seemingly doubling every 30 days, I refused to walk away with my otherwise comfy 25% investment gain. Convinced that Priceline was at the very least destined to retest its all-time high of $162, there was no way I was going to settle for a mere 25%. Greed got the best of me — and that's not the half of it.
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“It's critical to set target percentages for losses or gains and adhere to that discipline. If you double your money, for instance, take 50% off the table — especially with Internet stocks, where you can see 30% swings in the blink of an eye.”
Scott Kahan
Financial planner
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In early summer, having averaged down by buying more shares at lower prices, I still had a chance to break even. Not for long. Soon I was down 20%, 30%, 50%. By the time the company pulled the plug on Webhouse and preannounced a hideous quarter, it was too late. Within a matter of hours what was once my ticket to dot-com riches quickly became a nightmare of a capital loss that effectively wiped out the gains I had taken on other stocks earlier in the year. So went my fifth and final fatal error.
"It's critical to set target percentages for losses or gains and adhere to that discipline," says Scott Kahan, a financial planner in New York. "If you double your money, for instance, take 50% off the table — especially with Internet stocks, where you can see 30% swings in the blink of an eye."
"Too often," he adds, "people get greedy and [then] the bottom falls out. Be a little colder to your positions and be willing to pull the plug — or you can feel a lot worse later."
I can imagine my venerable college finance professor, Burton G. Malkiel — whose old-school adherence to rationality and cool-headed investing ultimately vanquished the dot-com paradigm — pulling out the few hairs he still has over how I completely ignored basic investing precepts in so many different ways.
I'm still learning.
I learned the hard way never to confuse the junk food of speculation for the meat-and-potatoes wholesomeness of informed and diversified long-term investing. I learned never to mistake denial during a stock meltdown for a patient buy-and-hold strategy. And I learned that the rubber-stamp approval of Wall Street yes men can never eliminate the responsibility to think on my own.
Prof. Malkiel, if you're reading this, I hope you'll consider my experience as an extra-credit exercise — and grade it high enough to keep you from flunking me retroactively. |
