To Infinity and Beyond?

            Five years ago, would you have thought Apple (NASD: AAPL) would be over $400 a share?  Four years ago, would you have thought Priceline (NASD: PCLN) would be over $500 a share?  Three years ago, would you have thought Las Vegas Sands (NYSE: LVS) would be $44 a share (was trading around $1.32 a share)?  Two years ago, would you have thought the Dow Jones Industrial Average would be close to 13,000?  One year ago, would you believe that the biggest solar energy company in the world, First Solar (NASD: FSLR), would go from $175 to $29?

            The market is full of surprises; some good and some bad.  During the Great Depression in the early 20^th century, the Dow Jones Industrial Average (DJIA) was in the 100s.  Today, it has been as high as 14,000.  Do you think early in the decade people thought the DJIA could go from somewhere in the hundreds to somewhere in the 10,000s?  That is an unfathomable leap! 

            Will the market be 27,000 in the next 10 years?  Will there be another boom like the tech boom in the late 1990s?  Will there be another round of companies that redefine the world, as we know it today?  The social media companies such as Facebook have done a good job of making that transition, but the IPO (Initial Public Offering) market has not responded in the way it did during the tech boom.  In the late 1990s it was almost guaranteed that if your company IPOed, it was going up 50% or more.  This year was the largest IPO year since 2000 and most of them have tumbled horribly.  Examples include Linkedin (NYSE: LNKD) $122 to $65, Groupon (NASD: GRPN) $31-$20, Zillow (NASD: Z) $60-$22, and Pandora (NASD: P) $26-$9 just to name a few. 

            To infinity and beyond looked reasonable back in the 1920s.  Is exponential growth still possible?  In five years will McDonald’s be $200 a share?  Will IBM be $300 a share?  Will the good stuff just keep going up or has the money been made?  Is the Dow reaching over 20,000 a long shot or is it inevitable?   

Google? What's a Google?

In the last 20 years, no mega-companies have emerged.  All the large companies formed many years ago, some in the early 20^th century.  For example, IBM was founded in 1910 (originally named Computing-Tabulating-Recording Co.) and Proctor & Gamble was founded in 1837.  They say old money is the best money, and these days that statement is holding true.  Can you imagine what your stake in IBM would be worth if your grandparents bought 100 of shares of IBM in the 1920s?  That’s what old money is!

            Google is an anomaly because it broke all of the rules.  It went public in 2004 and as soon as Google hit the open market their market capitalization was over $150 billion.  Today, Google is a $200 billion company and has only been trading for seven years.  Compare that to General Electric, who has been trading for over 70 years.  Was there a life before this Google?  Where did we search the web?  What did we use?  Today, “Googling” something is synonymous with searching.  We do not even use the word “search” anymore.  Google basically invented online advertising, which is a business that will never cease to grow.  To implement new software, all Google has to do is implement an upgrade and everyone in the world has it immediately.  They have very low overhead when it comes to new products and how to implement that product. 

   Google is one of the few competitors to Apple – not with hardware, but with software.  Their Android platform for smart phones is the only competitor to Apple’s IOS 5.  So how did Google get so big so fast?  What do they really do?  They can’t make all this money just from being a search engine.  The truth is, Google seemingly controls so much web traffic and content on the web (even owning YouTube) that they are the CEO of the Internet.

            You never hear anyone say, “I’m going to ‘Apple’ it,” (yet).  Does Google really have what it takes to be the biggest technology company in the world?  For a long time that title belonged to Microsoft, and now it belongs to Apple.  When will it belong to Google?

Easy to get in, Hard to get out!

            We all know the household name companies such as General Electric (NYSE: GE), Wal-Mart (NYSE: WMT) and McDonald’s (NYSE: MCD).  Most people know that these types of companies are great to buy and hold for the long haul.  But what if your strategy was different?  What if you were trying to make quick money off of super cap stocks (companies who’s market caps are larger then 100 Billion)?  Market capitalization is the amount of shares outstanding times the share price.  This is what the given company is worth on paper.  Let’s say you bought GE at $14 a share and it went to $15.5 in the next two trading days.  Let’s say you bought 1,000 shares. You just made $1500 in two days.  That’s a good return right?  Well, would you be able to sell it? Or would you think maybe it’s going to go to $17 a share?  These are all the questions that are asked when trying to unload shares.

            In the late 1990’s, a new company was on the horizon called Qualcomm (NASD: QCOM).  It bounced around for a while between $35-50 a share.  Hypothetically, let’s say we owned 800 shares of Qualcomm at $32 a share ($25,600).  In the next couple trading days it popped to $51 a share ($40,800).  In a couple days, your initial investment into Qualcomm has grown by $15,200 (+60%). 

            That is a huge return and you should sell your position in Qualcomm immediately!  On the other hand, maybe you want to let it ride?  Is that a good decision?  Making over 50% in a couple days is absolutely amazing. What are you waiting for you have to sell right? 

            If you would have sold your position in Qualcomm, turning $25,600 into $40,800 in a couple of days, would that had been smart?  Normally, yes of course.  But I used this example because in the coming months Qualcomm topped out around $654 a share!  Let’s do that math for fun.  Your initial investment of $25,600 would have turned into $523,200 (+428%).  Don’t feel so smart now, huh? 

            It’s not that hard to pick what’s good, rather it is extremely hard to sell it when you can make the most off it.  I used this example because it’s extreme.  Just to give a little perspective of why it is so hard to know when to sell.  Would you have held Qualcomm all the way to above $600 or have sold it on the way? (On December 31,1999 Qualcomm split 4 for 1 and was up 20 points on the first trading day after the split.)