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Learn This Lesson From LinkedIn

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Today, one group of investors doubled their money. Another group took a whopping 20% loss. That's not all that unusual -- except that all of those folks were investing in the same stock.

The debut of LinkedIn (NYSE: LNKD  ) certainly didn't disappoint thrill-seeking IPO followers. Having raised its offering price to $45, the stock opened around $83 and rose as high as $122 before falling back to close at $94.25. The price action brought comparisons to the tech boom of the 1990s, and led to arguments about whether the offering would open the door to a flood of social-networking companies trying to cash in by going public.

The answer to that question is an unqualified yes. In fact, it's already happening.

Betting on the social media revolution
With the success of LinkedIn's offering, you can count on interest in privately held social media companies only getting more intense. Already, the trading of stocks that haven't yet gone public has gained in popularity, with estimated trade volume that could hit almost $7 billion. Whether it's through private-company exchange facilitators like SharesPost and SecondMarket, or pooled investment vehicles that concentrate accredited investor money into a single stock, high-net-worth individuals are demanding access to hot stocks before they get to the general public.

In fact, demand is so strong that companies risk a public-relations nightmare if they fail to deliver. When Goldman Sachs (NYSE: GS  ) closed the doors on a planned offering of Facebook shares to U.S. investors, the deal blew up in its face, turning what would have been goodwill at giving exclusive access to the popular website's shares into anger at being shut out. JPMorgan Chase (NYSE: JPM  ) has also made moves to start a fund that could potentially give investors exposure to "late-stage" private companies like Groupon and Twitter.

In contrast to U.S. social media companies, which have been shy to go public, Chinese companies haven't hesitated to cash in with IPOs. Just look at the first-day performance for IPOs there, including Youku (NYSE: YOKU  ) , dubbed China's YouTube; E-Commerce China Dangdang (NYSE: DANG  ) ("China's Amazon"); and Renren (NYSE: RENN  ) ("China's Facebook") -- even if several of those stocks haven't done nearly as well in ensuing trading.

It's also important to observe that this phenomenon isn't limited to high-profile startups. For evidence of the health of day-trading, look no further than Jammin Java, a tiny company with ties to relatives of reggae star Bob Marley. Despite having no reported revenue and consistent losses, the company recently saw its shares jump from $0.17 as recently as late December to more than $6 a week ago, only then to fall to below $1 on Wednesday. The shares closed at $2.30 yesterday on volume of more than 20 million shares -- on a stock that traded only 200 shares during the entire four months from August to November last year.

How to think long-term
The hardest advice to follow with these offerings may also be the best: Ignore them, with the expectation that you'll get a second chance at the shares down the road at a cheaper price.

Certainly, that proved to be the case with the original Internet boom. Early investors in Amazon.com, eBay, and priceline.com made fortunes on paper -- until the bottom fell out of the market. Then, just as bulls had indiscriminately bid up shares of crazy-concept companies like Pets.com, bears quickly trashed valuations on even the most promising Internet companies. In the carnage that followed, you could have picked up shares of any of those companies at bargain-basement prices -- even as their viability and competitive position in their respective industries were actually improving. In other words, skipping the IPO could have saved you a fortune -- if you'd had the discipline both to wait and yet also to buy when the price was right.

Of course, there's no guarantee that the market will give you that chance. Certainly, early investors in Google bought their shares in the double digits and have never looked back. But missing out on the minimal chance of a big score is worth it if you avoid the much larger chance of paying way too much for an eventual flameout. Just as Warren Buffett faced criticism in the late 1990s that laggard Berkshire Hathaway (NYSE: BRK-B  ) was stuck in the "old economy," Buffett eventually emerged the winner, as Berkshire shares rose steadily throughout the tech bust.

Stay safe
It's hard to skip out on an entire industry, especially when it's the topic of conversation not just among investors but from hundreds of millions of users. But from a long-term investing perspective, it just may be the smartest thing you could do -- at least as long as sky-high valuations remain the norm.

Keep your eyes on what's next for LinkedIn by adding it to your watchlist today.

Fool contributor Dan Caplinger learns his lessons well. He owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway, Google, and JPMorgan Chase. Motley Fool newsletter services have recommended Berkshire Hathaway, Amazon.com, eBay, Google, and priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy survived the 1990s and will keep on ticking.


Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 21, 2011, at 1:29 AM, techlvr11 wrote:

    If you are an active LinkedIn user, you'd know the power of their networking. Over last 3 years, my best jobs have come through LinkedIn contacts. Compared to that, calls from traditional job sites have been quite underwhelming both in terms for quality and quantity.

    Constant updates and ability to connect with more people has given me opportunity to forge new, mutually beneficial relationships and strengthen old ones. This has resulted in real dollars as business deals formed helped gather useful data and postion products and services that otherwise would have been hard or prohibitively expensive to do.

    Today, a person without a linkedIn profile won't see many calls coming his/her way.

    It is not too far fetched to say that LinkedIn is the way to extend and maintain professional relationships and professionals will pay for the service.

  • Report this Comment On May 21, 2011, at 4:08 PM, beechtree1 wrote:

    What nonsense, techlvr11,

    You sound like the blog equivalent

    to a sandwitch advert.

  • Report this Comment On May 22, 2011, at 4:43 AM, akutach wrote:

    I think it matters what field you're in, but for technology jobs it's a must. Through a recent layoff my former company provided many HR resources for getting job searches organized. All of the HR reps who spoke pretty much said that if you don't use, maintain and groom a LinkedIn presence you're fighting with both hands tied behind your back.

    Key points to consider:

    HR love it and hiring managers too. For HR it allows them to learn more about a candidate than a traditional resume/CV including what they don't present or don't present well. For hiring managers, making contacts for good fits via LinkedIn means the candidate didn't groom their resume to seem perfect.

    Good continuing professional contacts - real time updates to what your forgotten colleagues are doing.

    A much better way to find somebody and to make a cold-call - the foot in the door when you have a 1st, 2nd, or at least 3rd degree contact at every company in your business.

    Initiating regular business aside from job searching. In my line of business I haven't used LinkedIn for this, but it's the first place I would go to find the person(s) I need to engage and whether somebody in my network could make an introduction.

    I'm not an investor or an advertiser for LinkedIn, and I don't keep up my account as much as I should. But I wouldn't think of starting a job search without LinkedIn being my primary focus for making contacts, learning about companies, and researching the background of their hiring managers and interviewers.

    I'll wait to see how things shake out as an investment over the next few years, but this is an area in social networking that may be much less susceptible to a imitators and second-comers. The cost to get to critical mass of participants may be too high since the users are not purely social and thus less likely to move on because it's no longer trendy or somebody has a new game or gadget.

  • Report this Comment On May 23, 2011, at 11:57 AM, lctycoon wrote:

    LinkedIn itself might be a good company, but not at the ridiculous price that the stock is selling for. Facebook is another one that's going to be going for idiotic multiples when it does an IPO.

    I'll sit this one out and look to hop in when the bubble bursts and the hype dies down. There's plenty of companies out there that are just as good that are selling for single-digit P/E multiples.

  • Report this Comment On May 25, 2011, at 4:17 PM, MaxPower13 wrote:

    "Over last 3 years, my best jobs have come through LinkedIn contacts." - techlvr11

    May I ask the obvious question? Just how many jobs have you had the last 3 years?

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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