Post of the Day
November 24, 1998
America Online Folder
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Subject: Re: We Closed Our Eyes
Petebu in 2485: Actually the Fool's cost basis for AOL is now $1.82.
Whoops, my bad. Fine, so if AOL drops down 84 points to a dollar a share, the FoolPort will be losing money. Does even the bearest of the bears expect AOL to drop down to a dollar a share anytime soon?
Petebu: Please explain why you would want to hold on to the internet stocks after the bubble burst?
Of course I wouldn't. My point is that unless you're looking backwards with 20/20 hindsight, there's no way to know you're in the bubble burst until it's too late. There is no way to time the buying and selling of individual stocks consistently. They go down and up. Sometimes they go way down. The overall trend for the long haul is that the ones that survive do go up.
So how is one to know which down is THE down? A bubble burst, after all, might just be a mini-correction of 20-40% before another runup. Witness the Dow sliding from 9300 in July to 7400 in October and before rebounding to 9100 last week.
Your stop order might throw you out when AOL drops down to 75 before shooting up to 110. Then what do you do? You have to find someplace else for your money... unless you want to buy AOL back at 110.
The decision of when and what to buy and sell is up to each individual to decide. If you want to move your AOL money to something you like better, that is your perogative.
Petebu: Would not stop market orders be prudent and then buy again once the price levels out or is near bottom?
Not necessarily. It depends. First off, how do you figure out where "near the bottom" is? That's as difficult as figuring out where "near the top" is. Just like a stock can plummet at any time, a stock can also rebound at any time. There's no way in advance to know.
Some people I know use target prices, which is fine, but when the stock hits those target prices you still have to figure out what to do with the money next. This is why often analysts will up their target prices when a stock hits a target price.
Second, your capital gains are only realized when you sell. If you sell, you immediately forfeit 15-40% of your profits in taxes before you can roll what remains into something else. If you sell at 85 and buy back at 75, you have less money to buy back with than you had just sitting in the stock, so then if the stock shoots back up to 85, you might actually have less money than if you just held it as it went from 85 to 75 to 85. Plus you've incurred additional commissions in selling and buying. Plus you have to figure out where to jump back in. Plus you've made your tax filing in April more complicated.
Now, we'd all like to sell at 85 and buy back at 6, but there's really no way to predict when (or even if) that will happen.
Petebu: Does everyone really believe that the Fools are going to hold on to AOL and AMZN until something about the company's dynamics change? I'll tell you what will be funny. Once the fool decides to sell AMZN and AOL, watching them wait a couple of days after the announcements to sell the stocks. Bye-Bye huge gains!
There's no way to predict what they will do, but that's up to them to decide based on their preferences. But I think they'll keep AMZN and AOL because they like the companies: the same thing happened when they kept IOM after everyone else was dumping it.
There is also the outside chance that AOL and AMZN will grow into their valuations. So don't discount that.
me: They won't be as lofty as they are now, but in my opinion a company that grows at 10-15% a year is still a decent investment if you can get it at a good price.
Petebu: If a stock is going to grow 10 to 15% and you are happy with that return, then why would the price of the stock matter?
Current valuation of the stock always matters because it in part helps to determine what the growth rate will be. If AOL were selling for a dollar right now, wouldn't you buy it? If AOL were selling for a thousand dollars right now, wouldn't you sell it?
My opinion is that the Internet stocks will correct themselves sometime, but I don't know if that will be in a day, a week, a month, a year, or a decade. I am patient enough to wait before even considering buying any more AOL. I do think there's a high probability that they will not be able to sustain growth from the valuation they currently have.
On the other hand, the cost basis for the shares I already own is reasonably low. My preference is to keep them rather than to cash them out. I'm of the opinion that a person should cash out only when s/he has a place s/he'd prefer to put her/his money. Right now I would prefer that money to be in AOL.
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