Feeling sadder but wiser after dot-com entanglements

Staying Ahead

Dollars & Sense

January 07, 2001|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

It's over, like a bad romance. Your mother told you dot-coms were no good and would let you down hard, but you didn't believe her. Now you're singing the blues, with your beloved Yahoo!, Priceline and iVillage down 90 percent or more in price.

Will they, and you, ever relive that peak experience of a year ago?

No.

You've loved and lost. Large numbers of dot-coms will fail, taking what's left of your money with them. The rest will be bought by real companies - no bonanza, but at least reprieve.

The question is what you've learned from the affair. Are you poorer but wiser? Or will you go chasing after the next hot items touted on CNBC?

Some of those hotties are already flouncing into sight - Internet software and hardware, to help companies link their business, inventory and manufacturing systems; wireless devices for "mobile commerce"; tools for creating e-selling sites in stores and malls; service providers, for managing corporate Web traffic; anything broadband (especially anything "optical," which is broadband on steroids).

But trying to pick the next winning tech stocks "is like standing in front of a nursery window and trying to pick the next Bill Gates," says economist Maureen Allyn of Scudder Kemper Investments in New York. A few of the stocks will soar. Many others will simply grind your dollars into pesto.

If your interest lies truly in making money, rather than gaining bragging rights, you need to know the rules of the speculative road:

The 5 percent rule. The world of venture investing belongs to institutions and the rich. The average investor who steps to the table is risking his or her savings on what amounts to roulette.

If you can't resist playing, throw no more than 5 percent of your money on the table. If your stocks or Internet mutual funds rise, take enough of the gain so you're still leaving only 5 percent loose. Protect your gains by investing in well-diversified mutual funds.

The boring rule. There's a New Economy but no New Paradiddle - er, Paradigm. Sooner or later, profits matter, and it's later than you thought.

The race to become the biggest is over in many Internet spaces. Amazon, Yahoo!, eBay, CNET, DoubleClick and a few others won. But all of those stocks have plunged recently, showing that growth in sales and clicks is not enough.

The price rule. There's a big difference between a great company and a great stock. Amazon, with its one-click technology, was a terrific idea. I'd expect it to be around a long time, in one form or another. But at last year's high of $89, investors overpaid.

Kathleen Shelton Smith, of the IPO Plus Fund, offers this new-era rule of thumb: A company growing by "only" 20 percent a year needs earnings to be a good investment. A no-earnings company (usually, one with no competition) has to be growing 40 percent.

The drain-the-pond rule. In bull markets, which raise all boats, no one cares what awfulness lies in the murk below. So far, the Dow and the S&P averages look like resting bulls.

The Nasdaq pond is something else - down 50 percent from its March peak. The Amex Internet index of 51 stocks is off 58 percent. As the water level drops, garbage is heaving into view - stinky accounting, rusted ethics, deep stock-price manipulation. In bear markets, all the surprises are usually bad ones.

The fake-out-the-suckers rule. When your favorite Net blimp lost a little air, did you "buy the dip"? That worked in 1999, but not during the bear months of 2000.

Bear markets love dedicated dippers. They pull you in, then chew off your head. Stocks like eBay (down 71 percent since its high for the year) and Amazon stage flirty little rallies that catch a bargain-hunter's eye, only to plunge again.

Here's a lesson in lower math. When a stock drops from $250 to $30, you lose 88 percent of your money. To get back to $250, your stock now has to gain 733 percent.

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