This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By
Admittedly each of the above companies, with the exception of JJB Sports (LSE: JJB) has some 'net' exposure. Also, in hindsight it may well turn out that the beginning of October this year was a screaming buy point. Markets were depressed on the back of interest rate and Y2K slow-down concerns. Even still, these gains are quite impressive.
Ah, that's a bit more like it. Off we move into the 'tech' sector and now we see some really great returns. So, who would want to invest in any company that's not technology-based, when over-sized returns can be made from companies like the above?
Before you start thinking that this is another IFA-bashing Fool's Eye View, it's not. Today, in our aim to educate the individual investor, I'm going to give people some home truths about stock market investing. Before I go on, I'll back-track just a little.
Over the past 80 years, the stock market has been by far the best long-term investment vehicle. With nominal returns of 12.2% per annum, it has far outperformed cash in a deposit account (5.4%) or government bonds (or gilts) (6.1%). As part of our education process, we therefore commend stock market investing to the general public. If history is repeated, and there's no reason to believe it shouldn't be, over the very long-term individual investors should ultimately be enriched.
Educate, amuse and enrich -- that's The Motley Fool's mantra.
Over the past few weeks, shares of a select few companies have been flying higher and higher. Almost exclusively, the companies have been technology concerns. I realise 'technology' is a very broad term, but basically I'm talking about companies involved in the internet / wireless / telecommunications markets. The enthusiasm for these companies has not, however, been totally confined to the obvious candidates. How's this for a list of unassuming FTSE 350 high-flyers:
1/10/99 6/12/99 Change %
Brown (N) 326p 614p 88.3%
WPP 571p 991p 73.6%
Capital Radio 894p 1525p 70.6%
JJB Sports 334p 520p 55.7%
3i 750p 1080p 44.0%
And, remember they are only over a 9-week period.
But how's this for action:
1/10/99 6/12/99 Change %
Freeserve 150p 525p 250%
Arm Holdings 950p 3310p 248%
Psion 1035p 3001p 190%
Here's where the education bit really comes in. I hate to spoil the tech-stock investor party, but none of the above returns are sustainable, over the long-term. If you annualise the Freeserve return, you'd be looking at a 12-month gain of over 1400%. That's not to say returns like that are not possible, but they are very very unlikely, especially when you consider Freeserve's (LSE: FRE) current market capitalisation of £5 billion versus sales forecasts for the year ending April 2000 of about £17 million.
That puts Freeserve on a price-to-sales ratio (PSR) of 294 (£5,000m / £17m). To put that into perspective, most FTSE 100 companies -- and right now Freeserve would amazingly qualify for entry into that index of the country's biggest companies -- trade on a PSR of less than 2. Put another way, if Freeserve were ultimately to trade on a PSR of 2, if would take them over 19 years of annual sales growth of 30% to justify their current valuation. That's a long time for 30% growth.
Am I a Freeserve bear? Not at all. I really admire what this company, which didn't even exist 18 months ago, has achieved in such a short space of time. According to Media Metrix, the respected market leader in Internet and digital media measurement, Freeserve is the most visited UK-based site, attracting 2.7m unique visitors in October 1999. Considering it has about 1.5m active registered users, this implies that another 1.2m individuals are using Freeserve.net as a destination site in its own respect. That's pretty impressive stuff.
Freeserve have captured what could turn out to be an unassailable lead in the portal / ISP race, and are going to be very difficult to dislodge from that position. AOL (Nasdaq: AOL) have an enormous lead in the US, and it is only getting bigger, largely courtesy of their first-mover advantage. Freeserve very much helped lead the relatively recent UK explosion of Internet usage, and therefore effectively have that first-mover advantage, even though the likes of AOL Europe and Compuserve (now owned by AOL) were here a long time before them.
You will note in the above two paragraphs that not once did I make mention of Freeserve's share price. That's because I'm an investor. A long-term investor looks first and foremost at the underlying business, and only then makes a rational business decision. If he likes what he sees, he considers buying a part-ownership of that company. In my opinion, at this stage the investor should know something about how much growth is built into the company's current valuation, even if it is something as simple as the above PSR calculation. If he doesn't like the company, he happily sits on the sidelines.
I'm one of those investors who thinks valuation does ultimately matter. Some investors, taking advantage of what I see as the current tech-share mania, have made a lot of money just diving into momentum shares, regardless of the quality or valuation of the underlying business. Who am I therefore to say don't do it, as many investors are clearly enriching themselves? In fact our own Rule Shaker portfolio deliberately throws valuation to the wind, so therefore you could be forgiven for thinking The Motley Fool is implicitly endorsing buying over-valued shares.
There's more than one way to skin a cat, and many of us here at Fool HQ have different investing styles. However, one thing we're all agreed on is the quality of the business is paramount. If you believe in Freeserve's business model and their future growth prospects, consider buying it.
But, know that at some stage in the future, and that could be 1, 2, 5, 10 or 20 years down the track, valuation will matter. If you've made gains of 1637% over a 20 year period, you've done well -- that's the equivalent of a compound annual growth rate of 15% per annum.
Also know that the returns made over the last few weeks, such as those listed above, are completely unsustainable. Individuals investing today in what I would call many of the highly speculative and highly valued tech companies, should realise that this mania will not go on. Annualised gains of 1400% or more are pure pie-in-the-sky sorts of stuff.
Sure, we're in the midst of a technological revolution, and these certainly are special times for those companies at the forefront of their industries. But, believe it or not, we've been here before. Competition, and the Internet is perhaps the most competitive of environments ever invented, has this wonderful habit of levelling playing fields. And, at the pace the Internet is moving, it won't take too long before many of the undoubted losers are outed. When the shake-out happens, make sure as an investor, you're not left holding the baby. Pyramid selling schemes always end in tears.
Related links