With the big IPO’s of Twitter and Facebook and their initial rocketing share price on day 1 of their float, anyone buying shares in these companies at such sky high price valuations will do well to remember the lessons of the past.
If you are under the age of 30 then you may have no idea what I am talking about.
Even if you are over the age of 30, you may have forgotten what happened in the late 1990’s or have fallen into the trap of thinking that this time it is different.
As I discovered in the late 1990’s when I was new to investing in shares, it is very easy to fall into this trap and lose money and I don’t want that to happen to you.
I wrote about the lessons I learned in the 1990’s with technology stocks here.
The 1990’s Stock Market Bubble
The late 1990’s saw the birth of the Internet as we know it today and many new start-ups were floating on the stock market.
Most of these new companies were expanding fast but not yet making a profit.
Since valuation of a company usually relies on physical assets, profits (earnings) or positive cash flow, it was extremely difficult to value these internet stocks because they were short of assets, making losses and burning cash like there was no tomorrow.
This explains why the companies were floating on the stock market i.e. to raise more cash so that their owners could continue to burn it.
What it doesn’t explain though, is why so many people including the so-called experts and little old me were duped into believing that these internet shares were worth buying.
Does any of this sound familiar?
Twitter is a modern Internet technology stock, growing its sales revenues but growing its losses and negative cash flows too.
I attempted to value Twitter in a previous post here, just before Twitter floated on the US stock market.
The valuation looked ridiculously high and that’s before the Twitter share price rocketed by 78% on day 1 of its float!
The share price has fallen back a bit since then but nowhere near enough for it to be fairly valued, never mind a bargain.
So how come so many people are buying these shares?
One of the biggest mistakes that you can make as an investor is to get emotionally attached to a company and your shares.
Emotional attachment explains why investors cling to the shares they own when their shares are falling in price and normal logic says they should be selling.
The result is that they sell eventually, when they have given up all hope of the shares recovering in price, and end up making a far bigger loss on those shares than they should have.
Emotional attachment also explains why people buy shares despite the share price valuation being stupidly high.
To my mind, this is what is happening right now with Twitter and Facebook in particular, as well as other companies like Netflix.
These companies have lots of fans who want a piece of the action regardless of the share price and it is these people who create surplus demand for the shares and push up the price well beyond fair value.
These people are not proper investors.
True investors who understand how to value companies, will avoid such company shares like the plague!
It’s not long ago that Blackberry was everyone’s favourite smartphone and look what’s happened to them.
I wrote about their probable downfall after the shares had a terrible 2011 and I got slated on Twitter by some of their fans at the time.
Blackberry fans were emotionally attached to the company and their products and thought the new Blackberry Playbook would save them.
What is a Playbook you might ask?
My point exactly!
It was a tablet computer designed to beat the iPad, by the way, not that it matters now.
Ignore The Herd
Just because other people are getting carried away buying stuff, it doesn’t mean that you have to do it too for fear of missing out!
They may not know what they are doing – they may just be following the herd.
If you want to be a proper investor then you must learn to ignore the herd and make your own decisions.
The best investments are always the ones that others have not spotted yet.
By the time that others spot them and the share price becomes toppy (like Twitter and Facebook), it’s already too late.
How To Invest In Shares
If you want to know how to analyse and find great companies to invest in then you might want to apply for one of my Stock Market Success Breakthrough Sessions?
We’ll have a chat and work out how you can unlock your hidden investment skills to create the wealth, income and life that you want but is passing you by at the moment while you watch from the sidelines.
Starting to invest in company shares of good, strong businesses is not difficult and won’t take up much of your time if you allow me to show you how.
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