Sunday, January 7, 2001
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Posted on: Sunday, January 7, 2001

Your Money
Pay heed to rules of speculative road

By Jane Bryant Quinn

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 the 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, I guess, is what you’ve learned from the affair. Are you poorer but wiser? Or will you go haring 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 some of 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 this year, 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 this year’s high of $89 (compared with $17 today), investors had 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 by 40 percent.

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 of the year) and Amazon stage flirty little rallies that catch a bargain-hunter’s eye, only to plunge again.

Have these and other Net stars finally fallen into bargain range? Lisa Rapuano, director of research for the Legg Mason funds, recently ramped up her position in Amazon but thinks Yahoo and eBay are still too expensive. Ethan McAfee, Internet analyst for T. Rowe Price, has gone only as far as DoubleClick and CNET.

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.

And that’s just to break even. How many of your knocked-down loves do you think have such fire in their heels?

Write Jane Bryant Quinn, Washington Post Writer’s Group, 1150 15th St. NW, Washington, DC 20071 .

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