Post of the Day
April 07, 1998

From our AOL
America Online Board

Subject: Deja Vu
Author: MarionsutS

In May of 1996 AOL was trading in the 70's. In October of 96 it was trading in the 20's. I remember this very well. The feeling was in May that the stock could only go up. AOL was going to be a major player in the future of the internet, so how could there be any risk in buying the stock? Many on this board believed that at the time , including me. In the weeks that followed after reaching the high in May, AOL proceeded to go lower. And lower, and lower, and lower.

Many questioned why it was going lower, and many differrent theories were offered. In hindsight, I have come to the conclusion, that instead of questioning why it went lower, we should have understood and questioned how it went higher first. I think it's important to understand the dynamics of momentum investing and short squeezing. When people like Cramer come on CNBC and say things like "stocks that go to 90 will go to 100"; "forget the 10K's their all boiler plate" ; "forget about earnings" "buy stocks that split"......ask yourself..... does this make sense? Is this really how to invest? I have sadly seen the words of Cramer posted all over these stock boards. When every stock in the "internet category" goes up... ask your self... can every horse win the race? Can they all be favorites?

The mistake we make, is when we believe that fundamentals don't matter. When we think valuations don't matter. When we ignore the fact that momentum investing and short squeezing is moving the stock.  

Let's go back to 1996. Who were some of the favorites then? Netscape was going to rule the net. Netcom was hot too. So was Compuserve. Some thought Spyglass was unbeatable. Go back to the historical quotes and look at the stock prices from 1996 to present for those companies. What went wrong? They were the hot internet companies of 1996. The internet is the future. Right?

The mistake we make, is when we believe that fundamentals don't matter. When we think valuations don't matter. When we ignore the fact that momentum investing and short squeezing is moving the stock.

Only recently did I hear the Motley Fools admit that the surge that Iomega saw in May of 1996 was the result of momentum investing and short squeezing. It's always clearer in hindsight of course.

So ask yourself the questions now, that you will asking on this board if the stock goes down. Do the research now, not later.



Subject: Re: Deja Vu
Author: Teacherjh

Marion, you pose good questions and good points... but it wasn't (IMHO) just momentum. In the years that led to the first peak at 70, the stock price was pretty much following the subscriber base. As long as we could add subscribers, the sky really WAS the limit. There are 200 million people... imagine 200 million people paying by the hour. With subscriber numbers screaming into the stratosphere, this was not an unreasonable scenario.

Subscriber numbers were ACCELERATING upwards... each month we added more than the month before.....

Or were they? Certainly viewed linearly (an all too common way of looking at things) everthing was taking off. BUT... if you looked at it LOGARITHMICALLY (where equal distance is an equal MULTPLICATION factor), the trend, which should be linear, was slowing down. Nobody noticed (except, I'm sure, AOL execs), because nobody looks at things logarithmically. Even the stock charts on AOL are linear, as if that makes it "easier to understand" for all us dummies. (there are a few log charts on the internet, but they are hard to find, and you have to work to keep them logarithmic).

The second thing to look at is the pace of overall computer sales.... there can't be more AOL accounts than computers, and we were starting to see that limit play a part. We were hitting the subscriber ceiling based on hardware.

Part two of this scenareo is that AOL stock price is NOT "momentum driven", but rather, NEWS driven. AOL was constantly having good news releases.... and the topper was when AOL and Microsoft made the deal that cleared out the Microsoft competition hurdle. THAT drove the stock from 50 to 72.

  I let my emotions get in the way (a mistake).. I had fallen in love with the stock. But at the same time, AOL is a hard stock to bet against.

Now where were we? What news could top that? We were heading into the summer, typically a slow time for sub numbers. I expected the stock to sag a bit... in fact I would not be surprised to have seen it hit 50 again, maybe even dip a bit below, over the course of the summer, until the next Christmas season. But what do you do? Cash in and pay taxes of about 30%, maybe even 50% in all, to protect against a 30% drop? I considered it... I considered selling short againt the box (a non-taxable event at that time), and I considered buying puts (which is what I should have done, and eventually DID do)

I let my emotions get in the way (a mistake).. I had fallen in love with the stock. But at the same time, AOL is a hard stock to bet against. I did not want to be on the outside while it moved up on news I hadn't thought of. Been there, done that. Thus puts were my best choice.

woulda...coulda... shoulda.


AOL "remade" itself, as Wall street asked (too soon, IMHO) to see the money. AOL finally stopped carpet bombing us with disks (an excellent strategy, but it was getting too expensive). With subs "noticing" the ceiling, AOL needed new sources of revenue, and "remade" itself.... and Wall streed never likes makeovers.

I knew it would drop.... but NEVER expected it to plummet like it did.

Oh well, too late now! I held on for a white knuckle ride; I knew it would come back, not so much because of the fundamentals, but because of the paradigm shift that was in fact occuring. A factor of two didn't scare me - I knew the stock was volitile... but a factor of three was no fun. It was however an opportunity to get my mom in, when the stock bounced several times against 22 (pre split).

Well, we're flying like a rocketship again.... What is different this time, if anything?

The first time, we were at the END of a ride (sub rate of increase declining)... I think we are now at the begiining of one... where the stock price will be tied (with assumptions, of course) to a revenue stream from advertising and commerce. There is plenty AOL can do... there is plenty of room to make this work. AOL is constantly making new deals... but we are not at a point where I can say "it will be really hard to top this!"... as happened when AOL and Microsoft made their deal.

That's what I see different. IF the stock goes down, I'm not sure how I would explain it. But even back then, I knew why it was sinking.

I'm open to other opinions. :)


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