Dazzling draw of Internet stocks; Investors succumbing to tales of huge profits, but experts urge caution


Murray Levin remembers his first taste. It was 14 months ago, and all of his money was in CDs because he had "a fear" of the stock market. A friend finally persuaded him to buy a few shares of Dell Computer, and he sold in less than a week for a $500 profit. That was the beginning.

Now Levin is among the hordes of small investors around the country who have lashed their fortunes onto the bucking broncos of the financial markets: Internet-based stocks that are producing spectacular investment returns, even as some of the businesses behind them lose money at a staggering pace.

He trades Excite Inc., Lycos Inc., eBay Inc., Amazon.com Inc. -- a bevy of stocks rooted in a technology that the 56-year-old photographer hardly understood a year ago. Many are upstart companies that have never earned a penny and yet produce near-instant profits for investors.

"I would have never believed this a year ago, that I would have bought stock for $300 a share," said Levin of Pikesville. "I would have bet somebody my house I wouldn't have done that."

Last month Levin could have sold his shares in Yahoo! Inc., a World Wide Web search-engine company, for a $30,000 gain, but he waited and his profit withered. Thursday, he took a $600 loss on some Philip Morris Inc. stock so he could buy shares in eBay, an online auction house.

These stocks in Web-based businesses are being traded in huge volumes, much of it by small investors who buy and then sell within weeks, days or even hours. Some stocks, such as eBay, have risen 35 percent or more in one day of trading -- and 1,000 percent or more over the past 12 months.

A well-timed investment in Web-based bookseller Amazon.com, for instance, could have turned $1,000 into $21,500 in less than a year -- and that from a company that has never made money and reported a $46.4 million quarterly loss last week.

Breaking all the rules

The phenomenon cuts against virtually every tenet of traditional investing -- Federal Reserve Chairman Alan Greenspan likened some Internet stock investments to buying a lottery ticket. And yet iron-nerved traders have ridden Amazon.com and other such stocks to dizzying payoffs.

"It is nuts," said Levin. "The people who own GE or Colgate-Palmolive, they couldn't live in this bailiwick. Even my broker can't handle it."

But some investors are handling it. Yahoo! stock turned $1,000 into $15,445 in a year. And eBay, which made just $214,000 in quarterly profits a year ago, turned $1,000 into $12,700 since October.

Some stocks' declines have been equally vast, but investors have flocked to potential returns that could otherwise take a decade to achieve. Even many conservative investors say they've been bitten by the Internet bug, unable to sit by, nursing their mutual funds, while investors in America Online or Amazon.com get rich.

Randi Weitzman, a 35-year-old insurance administrator from Timonium, asked her broker three times to steer her toward stocks in Web-based companies, but he talked her out of it. "He said it was too risky," she said.

Weitzman insisted last month, and bought into a mutual fund of computer-technology stocks that grew 66 percent in a few weeks. Now she plans to dabble in the more volatile trade of Internet-based start-ups, excited by her initial success.

'Missing out'

"I really felt emotional about it -- like I was missing out on something," she said. "I don't care if these companies are still in business in three years. I'll be out of it by then. Why not make the money while you can?"

Investment advisers have tried to temper the enthusiasm of clients who call seeking the instant results in Internet-based stocks. Many brokerage firms are reining in investors who borrow money to trade Internet stocks, making the so-called margin accounts harder to access because of the stocks' wild fluctuations.

But it is difficult to preach prudence when scores of investors are tripling their money.

"The story, let's face it, is about greed," said Mitchell Peremel, vice president of Peremel and Co., a discount brokerage company in Pikesville. "It is mind-boggling. People just think it is easy money. But it is like a bubble, and bubbles pop, and it will. This is part of a mania, and manias are not good."

Computer consultant Brian Amend, 32, of Baltimore is among those investors who have found it tough not to be swept up by the mania and lure of potential windfall profits.

Amend said he bought Amazon.com last year at $123 a share and found himself checking the share price daily to see if he should sell and take a profit.

"It would go up a lot and then fall all the way back down, only to go up even further than it did the first time. There is no rhyme or reason to it," said Amend. "The stress level of watching some of these stocks on a daily basis is too much for me."

Seeking 'survivors'

He found the volatility maddening and gave up in favor of a long-term approach.

"I'm looking for survivors -- companies that I think will still be around in five years or which have merger potential," he said. "I really believe that the Internet is going to completely change the way we live and do business."

Many investors and analysts agree. While the potential profits of Internet stocks are a considerable attraction, so is the belief that the Internet will become the accepted conduit for communications and trade.

Operating losses haven't scared away investors, some say, because the market isn't concerned with a company's performance as much as its possibilities.

Joseph P. Bailey, an assistant professor at the University of Maryland's Robert H. Smith School of Business who specializes in Internet economics, said the profit-crazed investors might prove to have more business savvy than people think.

The stock growth is probably fueled in part by the markets' momentum, he said, but it is also rooted in a technology that shows almost boundless potential. Amazon.com is losing money, but it is also pioneering an industry that could ultimately transform the way the world buys and sells, he said.

"It seems ludicrous if you just define the market as book sales," Bailey said. "But the potential for the business model is huge."

Still, many investors admit their interest in Internet stock is grounded more in quick profits than corporate commitment. Dan Rohn, who quit his job to manage his stock portfolio for a living, said he always planned to pursue solid, long-term growth. But the numbers were too tempting to resist.

Since June, he has made a 200 percent return. At his best, Rohn will make $5,000 for a day's work, trading over the Internet from his home in Chevy Chase.

"It's tough to just sit here on the sidelines and not get in there and make some money," said Rohn, 32, who was an assistant business editor with America Online until last summer.

"It's like having a computer and a mouse in Las Vegas," said Rohn. "Some of these stocks aren't much different than throwing your money on the craps table or the roulette wheel and letting it ride."

Getting out

Rohn, in fact, said he has had enough. He made the amount of money he wanted to make and plans to invest in the Internet's less-volatile offerings such as America Online, Lucent Technologies Inc. and Cisco Systems Inc.

"I've been successful at it," said Rohn, "but I wouldn't recommend it for the faint of heart. Those stocks require a lot of baby-sitting and hand-holding, and a lot of institutions don't touch them. I'm finished."

Other investors, such as Elliot Shefrin, a computer scientist with the National Institutes of Health, also are heeding lessons learned from the volatility of Internet stocks.

"I want Amazon.com. But every time I think seriously about buying it, I back off. It may look like high reward today, but it's really high risk," said the Columbia resident.

After taking a 20 percent loss in an Internet stock fund, he's playing the "safer" edges of the Internet boom by investing in companies with strong product sales and balance sheets, including Microsoft Corp., Intel Corp. and Compaq Computer Corp.

The cowboy attitude of some investors makes him shudder.

"The way it is now, a lot of young investors believe there is absolutely no risk in the market. They've only seen good times. To me that's dangerous. It's no more than gambling."

Sun staff writer Bill Atkinson contributed to this article.

Pub Date: 1/31/99

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