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Technology Stocks : Internet Analysis - Discussion -- Ignore unavailable to you. Want to Upgrade?

To: jbe who wrote (334)	4/21/1999 12:33:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 419

Good morning Joan, Your questions are not nearly so simple as you may think. Let me begin by saying that I agree with Siegel. To put his arguments in succinct terms, the internet stock valuations do not seem to be driven by fundamentals. Why then do stocks that are not primarily internet companies get crushed when the internets fall? One of the reasons may have to do with the kind of business SWS and its subsidiaries are in (I am not familiar with the company, so this is conjecture). If they do a fair amount of investment banking a drop in the market generally means that IPOs are delayed and that translates into a drop in revenues. That's why brokerage houses are very sensitive to the overall equity market and interest rates. Financial theoreticians like to think of two kinds of risk: market risk and non-market risk. Let's start with market risk. It is the risk you suffer based on the moods, whims and general attitudes within the equity markets. Sometimes it is industry specific (as in the case you cited); other times it is sector specific (as in Monday's tech sell-off); other times it is the entire market (as in October, 1987). These are extreme examples, but they serve to illustrate the point. Business risk is specific to the individual company. If you were unfortunate enough to hold NETA (as I was) you understand full well what this can do. You indicated that you owned CPQ, so you know the pain that business risk can inflict. Luckily, business risk is diversifiable. That means that with a large enough, well diversified portfolio the business risk is virtually 0. That is the rationale behind holding a diversified mutual fund or stock index fund. You are really telling that you are envious of the returns that the momentum players seem to generate. I am too. But I know better than to play with that kind of fire. We saw the same kind of lunacy in the 1980s with biotechs, and it ended badly for most investors. Suppose you had decided to play the game with AOL. What is your entry point? Would you have bought AOL at $160 only to see it drop to around $116 a couple of weeks later? And what would you have done then? Sell because the momentum was negative only to see it rebound above $130 today? I guess what I'm trying to impart is the idea that there is no rational way to approach these things. I have no idea when the internet bubble will burst. For all I knew on Monday it might have burst yesterday sending AOL down to $5 or so. The momo guys play the greater fool game. They buy a stock simply because they think the price is going up. Then they sell it pocketing a nice profit. Repeat as necessary to get rich. But the problem is that they depend on a greater fool to make this scheme work. Who is the greater fool? Why another momentum investor, of course! I think of this game as financial musical chairs. You know that when the music stops there will be a loser. I hope I have not been eel-like in my answer. If so, please pin me to the mat. TTFN, CTC