THREAD MINING...FOOD FOR THOUGHT
This post is a little dated but the observations
are 'timeless' .. insert your favorite stock
for the ones mentioned here.....................
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From Briefing.com...."On Opportunity Cost and Internet Stocks
Do you feel like an idiot because you didn't own any EBay (EBAY) before its big run?
Books-A-Million (BAMM)? ONSALE (ONSL)? Yahoo (YHOO)?
Thinking about rushing in now? Make sure you aren't reacting solely on opportunity cost
motives.
"Opportunity cost" is the name for money lost because you missed an opportunity.
As a motivation to buy stocks, making up for lost opportunity costs is one of the worst.
For many people, the motivation drives them into a position after all of the opportunity is
gone.
Nevertheless, it's one of the principal emotions driving some stocks, particularly the
small cap internet stocks, right now. The feeling of being left out. And wanting in.
How We Got Here
Opportunity cost as a motivator has become more and more prevalent recently as
stocks, particularly Internet stocks, have sky rocketed in 1998. Here's is Briefing's take
on a short history of the how we got to today's environment.
First Wave, The True Believers
Originally, around the middle of 1996, when the first pure Internet companies such as
Yahoo (YHOO) began to be available, long term believers in the future of the Internet
threw fundamental analysis out the window and wanted only a piece of the future. It
didn't matter what the underlying business numbers were, the future was certain to be so
huge, it was worth investing, simply to make sure you had a piece of it now. Because
the upper limit of the Internet was impossible to predict, there was no way to conduct a
traditional business analysis. It was just important to get in on it. Briefing believes this
point of view was essentially valid, although we stressed that investors need to realize
that they are making bets closer to venture capital investments than true business
investing.
Second Wave: Validation Through Revenue Growth
When revenue figures began to grow, as with Amazon (AMZN) and Yahoo (YHOO),
the number of believers began to grow. Even people who resisted the early Internet
hype came to realize that the revenue growth validated the future visions of the Internet.
The people who jumped in at this point, those who waited for real proof of revenue
growth, far outnumbered the initial investing pool. Institutions became interested in the
bigger names, including Yahoo and Amazon. As more and more people wanted a piece
of the Internet, and with few actual shares available, the stocks began to rise sharply.
Third Wave: Profit Justifies the Business Model
But then, when Yahoo and America Online finally became profitable, true"hold-forever"
investors started to jump on. The revenue trend, in particular, was extremely impressive,
and now that were profitable, long term investors felt justified in jumping on. The
addition of these types of investors, which includes many more institutions, simply added
to the number of potential buyers, without increasing the supply of stock.
The return for these investors has been dramatic, even though they waited. Briefing, for
example, did not add Yahoo (YHOO) to our Core Investment Portfolio until just before
they became profitable in the fall of 1997. And although the first wave investors have
seen their investment grow to 20 times, third wave, long term investors have received
ten times their money on Yahoo in only about one year.
Add Momentum Players, Add Daytraders
With the incredible price rises, momentum investors and daytraders, began flocking to
the Internet stocks. When the lack of supply drove up prices dramatically, particularly
on days of eventful press releases, it caught the eye of daytraders.
The daytrading mentality is completely different from that of a long term investor. To
some daytraders, it doesn't matter at all what shape the underlying business of the stock
is in, or even what it is. It is just enough to know that volume is moving and prices are
rising. Long popular among micro-cap and bulletin board stocks, the dramatic price
swings of Internet stocks attracted them strongly.
This is the point we are at now for many internet stocks, particularly the second-tier, or
lesser known, smaller companies.
Trading in some Internet stocks is actually dominated now by daytraders and
momentum investors. The daily volume on the stocks comes close to, or exceeds, the
float (total publicly available shares for trading) on a daily basis. Since it's inconceivable
that every share in the float is actually trading, it's obvious that many people are turning
over stocks on a daily, even hourly basis. Examples in the past week include
Books-A-Million (BAMM) which traded more than its float on Wednesday and Friday
(11-25 and 11-27) and ONSALE (ONSL) which traded 50% more than its float on
Friday, despite only three and one-half hours of trading.
What's This Got To Do With Me?
The point is simple: experienced daytraders know what they are doing. When they get in
too late, they get out quickly.
If you take an initial position in a rapidly rising stock dominated by daytraders and
momentum players, you will have to play by their rules. The ones who enter last, with
the intention of investing in Internet ecommerce long term, often get creamed when the
momentum leaves the stock.
The stock charts of second-tier Internet stocks like Market Guide (MARG) in April and
Ktel (KTEL) in April and mid-November are prime example of this phenomenon.
There were two types of people who bought stock at the peaks of each of these
companies: 1) daytraders who were late or trying for another quick flip; and 2)
long-term investors motivated by opportunity cost losses to "get in" while they still could.
The daytraders most likely closed their positions at a loss a half-hour or an hour later.
The long-term holders are probably still holding, waiting for the next surge.
The point today? With more and more stocks, particularly in the last week, experiencing
tremendous runups, there are more and more investors motivated by opportunity cost
"losses" to come rushing in.
If the desire to "not miss out" is motivating you, make sure you understand why are you
investing. Applying the first wave motivation to today's environment could end up
costing you more in real losses than you would ever have missed in opportunity cost
losses, particularly in the smaller, second-tier Internet stocks. "
EOM------------------------------------------------------------------
Jim in CT..
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