
students often ask professors for advice that extends
way beyond their expertise. last week i couldn't resist commenting in an area in which my non-expertise is well-established: stockpicking. i tried to talk a student out of buying
google stock for two reasons, both of which came up on talkradio today: google's current dominance could slip away quickly and the stock is
still too expensive.
google continues to gain
market share over other yahoos, and its cultural dominance is evidenced in verb form (
to google). my student believed in the company and its products, watching the price drop from $475 per share to $378 per share from january to march. she saw this as a chance at buying three shares with her limited funds. i saw this as a chance at catching a falling knife. satisfying if you can pull it off, of course, but potentially quite painful.
why not buy google? i'm one of those suckers who buys stuff based on a smart and principled mission statement (well, i
warned you i'm no expert). google certainly has
that. they believe
you can make money without doing evil. hey, that's
my mission statement too! or, at least it explains why i became a professor. my best guess is that one could make some short-term money on
GOOG, buying on dips and selling shortly thereafter (is that evil?). still, i'd be nervous about any attempt to buy and hold the stock. i like google's products and their mission, but this student can only afford a couple different holdings. why do i recommend google products and philosophy but not google
stock? experience and price.
experience: though i like all things google and use them every day, i wouldn't bet that i'll be using them in five years. when i started professin' in '95, i loved
netscape and used
it every day as well. remember netscape? it was a terrific browser that held 75 percent of the market. it truly changed the world. but now microsoft's internet explorer holds
80 percent of the market and netscape is long gone. of course, google has clearly learned from netscape and some say they will beat microsoft at its own game. but
microsoft is coming in a very serious way:
"What we're saying is that in six months' time we'll be more relevant in the US marketplace than Google," said Neil Holloway, Microsoft president for Europe, Middle East and Africa.
i'm not buying mr. softie's bluster (six months? no chance, dude), but microsoft brings
a lot of cash and legions of very smart people to any project they deem a priority. and they've been gearing up for this for years.
price: i'm not experienced valuing stocks, but
any way you cut it, google seems overpriced. they'll need tremendous growth just to maintain their
current price. google is trading at $378 per share, which is about 75 times their current earnings. this is the sort of ratio that reminds investors of the dot.com bust. as a frame of reference, microsoft has a p/e ratio of 22 and yahoo has a p/e ratio of 25.
it was kind of funny to talk to a student investor who was
too young to remember the
little tech correction that took the nasdaq from 5000 to 1100 a few years ago. at 5000, everybody but
warren buffett chucked p/e ratios into the dustbin of history. i wouldn't
short google, since i think it is bad karma to
short stocks with cool mission statements (it basically involves betting against a company) and i want google to succeed.
what did i recommend? i had some ideas, but then i remembered that i don't know what i'm talking about. so, i made a referral instead by suggesting fidelity
contrafund and its manager will danoff. here's why: i bet on
people rather than companies or stocks or mutual funds. contrafund manager
will danoff has pretty much the best record in the business and he's still hungry. his incredible fifteen-year run has beat the market in good times and bad.
he bought google at $85 per share, so she (and i) could still own a little piece of the company we both like. danoff's biggest challenge now is dealing with success -- the fund is
too big.
another manager i like is
todd mcallister of
heritage midcap. mcallister is a ph.d. economist who looks for companies that have
monopolized some market niche. i've always been a sucker for
theory and his theory seems to work pretty well. of course, i was once seduced by what i
thought was a great theory. this not-to-be-named fund solicited picks from about 30 of their analysts and spun them into a fund. the theory didn't work so well in the five years that i stuck around.
hedging one's bets seems like a good course of action in this case and most mutual fund investors probably own both google and microsoft. a corollary to my "betting on people" theory applies to betting against people. if you
really want to bet against bill gates in the coming search engine wars, you're a braver person than i.