Thursday, December 30, 2004


A reader, who does not know me well, was surprised when I purchased more Google at $191 per share. When I buy a stock and it goes up, I often buy more (averaging up); when I buy a stock and it goes down I study the situation all the more. If the market is up and my stock is down, I may have invested in the wrong stock. I am extremely cautious about averaging down. If I buy a loser, I am likely to take a short-term tax loss and to seek greener pastures.

My most profitable stock to date is up over 120 times since my original purchase in 1983 and I lost a fortune! Back in those days, I had not learned to average up. I made big money but, WOW!, I could have made big $$$$$$$$. (Did you notice the 8 digits?)

In the past three years I purchased EBAY six times and paid 300% more for the last shares versus the first shares. My most recent GOOG purchase was my fourth purchase and I paid $20 more per share than the previous purchase and more than $100 more per share than my first purchase.

One must take a big gulp when buying GOOG. The stock trades at better than 70 times 2004 earnings. S&P and others evaluate the stock as being worth about $190 by discounting future earnings at a 17% rate and assuming a growth rate of 90% compounded for the next three years! The term often used to describe this situation is "the stock is priced to perfection". If anything goes wrong, the stock price will fall quickly; there are lots of things that could go wrong.

My concern is not one the ones I hear the most. Many folks are concerned that one or more of the small search engines will develop an innovation that will take market share from GOOG. Another fear is that GOOG, YAHO and MSFT will outbid one another and pay too much for small companies with new technologies.

Many folks say to stay away because the whole business is over-priced or too competitive or they recommend buying the little guys hoping for a brilliant new app or a takeover. The first position could easily turn-out to be right in the near to intermediate term, but I believe the second position is clearly a losers game. How many times does the market have to prove that ones best odds are to buy the market leaders? Huge fortunes have been made buying one or two good stocks and holding on. Huge amounts have been frittered away trying to find an underdog to take out the king; most of the time the king is just to powerful to be overthrown.

Look at it this way; how would you like to run a business competing head to head against GOOG, YAHO and MSFT? These firms have money, relationships and skills that will allow them to run the little guys out of town.

It is amazing how many things one can already Google and there are many more to come. In our office, a day doesn't pass unless someone asks a question and the reply will be, "Google it". Even AMZN and EBAY have some risk of being passed over by search engines. One option may be to google or yahoo search for a used copy of grapes of wrath for under $5. The results may show an AMZN best price, an EBAY best price and Joe Smith's best price. If the Google search box is present on your desk-top or on most web sites, many may not bother to open their EBAY account to do a search? In the same way, if your browser has MSFT search built-in, one may not bother to Google.

By the way, Craig's List (19% owned by EBAY) has built a commanding position in classified employment ads and is hammering the newspaper business. Why pay the LA Times $750 when you can get better coverage for $75? EBAY just paid big money for and seeks to take over the residential rental market.

EBAY has had a lock on auctions because of the scale they so quickly achieved. When anyone wants to find an item for sale, they know EBAY is likely to have it. GOOG has the same kind of scale in search. There are other search engines but GOOG has a loyal following and the GOOG search engine is still the best.

The risk, apparent to us all, is from MSFT. It is not news that the Windows platform gives MSFT a super competitive advantage. Netscape, Lotus, Quicken, and many other large companies have been sliced and diced by the power of owning the platform or from the seemingly limitless capital MSFT can throw at a market segment. It is not news that MSFT has introduced a new search engine or that the search engine includes Encarta as a bonus feature. It is not news that MSFT will eventually have spidered just as many sites as GOOG. It is not news that MSFT has been working on the next version of Windows for several years. And, it is not news that the next version will embed MSFT search into the built in Explorer Browser. Because FoxFire has GOOG embedded, MSFT may even introduce a browser upgrade before Long Horn is released.

There really is no news big enough to sway ones decision to purchase GOOG at current prices. I simply keep buying GOOG because I believe it will survive as number one or number two in the search business and I believe the search business will become extremely large. I believe in the GOOG model which means that I believe GOOG can continue to make money by offering many free services in exchange for advertisement space. The one-man shop and the monster business needs GOOG and receives real value from GOOG because of the ease of putting relevant advertising in front of the exact number of customers the business can handle.

Libraries are big but are currently being reduced to the size of your pocket computer (cell phone, PDA, game machine, lap-top). Video and radio are two more areas yet to be catalogued. Blogs are relatively new but billions of people will one day post to multiple on-line "diaries, calendars or communication ports". On-line schools, conferences and meetings may be sponsored exclusively by advertisements. The number of adds to be displayed on emails will become a very large number. We are at the start of a process that will take years to mature.

If you buy GOOG today and tomorrow MSFT announces a new browser with search embedded, GOOG may drop 25 points or more immediately. If MSFT rolls out Long Horn (Windows version X.X) and if Long Horn has many "anti GOOG" features GOOG could drop even more. On the other hand, if the 4th quarter report turns out to be as strong as I think it might, GOOG could go up 10, 20 or more points in a day. In fact, since over 10% of the total float is currently sold short, the pop could be very large.

Although the stock may have partially discounted some of the facts and rumors yesterday and today, it is amazing how much retailers paid for certain search phrases in the final few days before Christmas. Some key words fetched $10 or even $20 per click! Even AMZN got in on the game. AMZN reportedly dramatically increased its average ticket size by key word targeting digital cameras and other hot electronic products. In the past couple of months, lawyers paid dearly for Vioxx and Celebrex in the hopes of meeting up with potential million dollar litigants.

GOOG has been a volatile stock and will continue to be volatility for some time. It is foolish to try to play the stock short-term. It may move against you quickly no matter which side you take. The biggest mistakes I have made in the market have been to sell winners only to watch them zoom for years thereafter. How many of us made good money on a relatively short-term DELL trade? How many of us bought DELL early and made 8,000% in five years? The GOOG key is to decide if you believe the story or not. If the decision is yes, do the gulp and hang on for the ride.

My decision is to DO THE GOOGLE GULP! Hard decisions are almost always the most profitable ones. Just a few weeks ago, it was hard to buy CAL (Continental Airlines) when the airline news was absolutely terrible. Just a week or so ago, it was hard to put in a market order to buy PFE (Pfizer) with the stock indicating down $4 on the opening. Right now, $23.52 PFE looks great and $8 CAL looks fantastic.

Please keep in mind that the difficulty of making tough decisions is reduced through good portfolio management. My families total ownership of GOOG is a relatively small portion of our net worth. No one stock should start out at more than 7% of your total portfolio value. The exception might be the young person who has discretionary income and who is committed to building a portfolio over time using dollar cost averaging and time cost averaging techniques.

Buy through BrownCo and spend only $5 on the trade!

There is no charge to have this amateur review your portfolio!

This was written for entertainment and educational purposes only!

I write for you in the hope that you will be kind enough to refer me to your friends!


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