Day dream believers

If some savvy dot-com executive walks away with $10 million after a successful float, and then the stock tanks, that means somebody else has just lost the same amount of money. But day-traders and other SOHO investors don't usually have that much capital to lose. Mostly they probably have up to $20,000 or so to 'play' on the stock market. That means up to 500 investors have been wiped out to provide the $10 million for our lucky dot-com exec.

If you multiply these figures by the number of floats and the amount of money in the pockets of the people who managed to walk away with the prize, we're looking at hundreds of thousands of small investors who have been savaged by the tech-stock gyrations. And now they're back for more.

What does it take to make these people realise that 'making money' requires more effort than choosing the right horse or picking the right number at the casino? A lot of these 'investors' would actually be better off at the racetrack or the casino. The odds are better.

It seems that with any 'gold rush' nobody will believe it is over until the last goldmine is fully exploited and there are no more reports of new discoveries. However, unlike the gold rush analogy, there appears to be nothing stopping dot-coms from raising another IPO.

What needs to change is the way that investors analyse each IPO, and there appears to be a major failing on the part of seasoned financial analysts to come up with any useful guidelines.

When the whole dot-com gold rush began, there were many analysts saying it was impossible to value a company that had yet to show a profit. Soon they either changed their tune or were swept aside by those claiming that revenue was sufficient for a valuation. Utter rubbish, as we all discovered in April this year. Once again, basic math. It doesn't matter how much you earn if you spend even more. Even pre-schoolers know that expenses must be kept below revenue - pocket-money for them, or else extra funding will have to be negotiated - from their parents. Why then do adults have so much difficulty with the concept?

Obviously the 'new economy' will produce some new companies that will succeed and continue to grow over time, and investors will be very happy if they have parked their funds with them. Choosing which companies to invest with is still not obvious even to the so-called experts. Putting your money into the companies that produce the picks and shovels of a gold rush has been touted as a safer strategy. But even the likes of Cisco and Telstra have come back down to earth recently.

Probably the most successful local IPO belongs to Melbourne IT. How can you go wrong buying into a company that sells the essential ingredient for being a dot-com, the dot-com name itself? Well, after six months' trading, if you'd invested $10,000 in that IPO you would now have . . . $10,000. If you were canny enough to stag the float and sell at the peak, you could have almost doubled your money. But very few investors expect to watch the market that closely. Most are interested in longer-term plays that see them set up for retirement or paying for their kids' education. And with no brainpower required at all, you could have put that $10,000 into an indexed share-market fund and done just as well. Be careful out there.

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Ian Yates

PC World
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