Time to separate wheat from the shaft (as in losses). Earlier this year ISDEX screamed to its all-time closing high of 696.76. June 2 the Internet Stock Index was 484.31, down 30% from the top. At times the ISDEX has wavered close to 50% off the high and many of the better-known stocks have dropped as much.
Said another way, with Internet stocks now coming into a more “reasonable” valuation level it’s time for real investors to consider their positions. Philosophies. Religious beliefs.
Earlier this year I believe we experienced wild speculation in the Internet sector — too wild even for the faithful — as speculators ran rampant and snapped up “dot coms” in a frenzy only seen only in the Mad Cow scare of recent memory.
Now that speculators are banging their heads uncontrollably against the wall and Internet stocks trade more in line with market mood than anything else, I think investors may emerge as a more prominent driving force.
There’s a key difference between “investors” and “speculators.”
Investors will look at the underlying growth of the Internet, the continued roll out of new services, the expansion and adoption of the Internet in businesses of all shapes and sizes, international growth starting to echo that of the U.S., the $12 billion in venture capital flowing into the Internet, the Fortune 500 companies having to have an Internet strategy or lose marketshare for the future of business, and more.
Speculators will look at the drop from the top and wonder what happened. That leaves them out of the market if they choose that approach, which I believe benefits Internet stocks.
Wild unfettered exuberance only serves to create a artificial valuation scenario where no Internet stock benefits, no Internet company benefits. The runs are not based on business-driven fundamentals but on herds of spec traders looking for the next big thing, the next virtual Vegas style fruit machine to pop a quarter in.
I think Web-based brokerages that came out with TV ads promoting the notion of getting rich quick trading stocks on the Internet should really consider more closely the message they are sending the general public.
I’m sure many have seen the one where the truck driver has a picture of the island he bought on trading profits. There are several more examples from different brokerages.
Billboards on Highway 101 in Silicon Valley likewise describe similar themes.
The surprising thing is none of the ads mention any actual Internet growth or industry statistics but all rely on notions of easy profits trading stocks.
I don’t think these approaches do justice to the real Internet, the real industry growth and unprecedented capital flowing into the sector. They highlight a false sense of reward and not risk in investing in a new and volatile fantastic industry.
As the market’s drop highlights the risk side of things the time now is to focus on business and not herd mentality, on value and not speculation. In a word, investing.
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