Byline: NEIL THAPAR
THE quickest way to boost a company's share price in 1999 has been to stick an Internet label on its stock and watch it soar.
From next month, the Stock Exchange is creating a market sub-sector of Internet companies. Though it will not appear under a separate heading on newspaper share price pages, the move has created a stir in the City.
The first five members - EasyNet, NetCall, Voss Net, Gresham Computing and Internet Technology - have surged by 85% on average since the start of the year. They now sell on average at a heady 100-times earnings. New Internet service provider Virtualinter-net.
net soared on its arrival in January, while the latest member, Dialog which campaigned to be transferred from the media sector - has risen 45% since March 1.
On paper, backing these stocks looks like a foolproof way to make money, ahead of the sub-sector going live on April 1. But this could make April fools of investors.
Analysts who follow Internet stocks are unhappy with how the sub-sector has been compiled. Words like 'incongruous', 'ragbag' and 'misleading' are among the milder expressions used to
describe this odd collection of stocks.
They say the selection criteria are crude as they do not examine whether a company depends on the Internet for its living or just makes use of it.
Dialog, led by chief executive Dan Wagner, claims [pounds sterling]60 million of its [pounds sterling]170 million turnover derives from the Internet. Yet much of this is because it now prefers to deliver services via the Internet rather than calling by phone.
Information provider Reuters could make a similar argument, but does not.
Gresham has some e-commerce interests but is essentially an assortment of software and service businesses. Voss Net provides consultancy and has a small Internet service provider company.
Officially, it is bemused by its 193% rise in share price.
For every company included there are notable exclusions, such as Zergo, Geo Interactive, JSB and Infobank. All are classified as software companies, even though their products work and are designed exclusively for the Net.
This is a sub-sector to avoid. Internet stocks can be a fast track to losses as much as a route to riches.
Bargains slip away
THE oil sector has highlighted the weakness of funds that follow stock market momentum.
These invest by rote and chase up stocks that are outperforming the market or are members of a share index.
But such lemmings ignore bargains, and do not anticipate turning points in a sector's fortunes.
When Midas recently called the bottom on oil prices and suggested Lasmo and Monument were poised for recovery, few funds would touch them.
Since then, the sector has rallied thanks to production cuts by oil cartel Opec. Lemmings will now have to pay a premium for such stocks.
Fast meal spoils feast
SO Warren Buffett, the world's most successful investor, is human after all.
For the first time in 18 years, the share portfolio owned by Berkshire Hathaway, his master company, failed to beat the stock market during 1998.
His long-term record is still way ahead of the crowd - about 24% annual growth stretching back over 30 years.
Even so, Buffett blames the sluggish performance by his portfolio on taking profits too early in fast-food giant McDonald's.
The shares kept on rising and closed 1998 with a gain of more than 60%.
Buffett's one-liner on the subject is a 24-carat nugget of wisdom.
Owning up to the mistake to Hathaway investors last week, he said: 'Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours.' Buffett usually takes a long-term view of his stocks, often holding shares for 10 years or more. They have repaid his patience with spectacular gains.
But most investors sell out too early. This is a mistake for three reasons. The stock market often finds it difficult to value companies with favourable long-term prospects. Only over a long timeframe will their share prices be re-rated to reflect their true worth.
Second, even great businesses can run into setbacks, but the market will often overreact to problems. So don't let a share price blip sway your judgment about long-term potential.
Third, the magic of compounding works best the longer you hold a share. A company whose profits grow at 20% a year will double its share price in four.
Over 10 years it will rise sixfold.
Midas has made its own share of mistakes by snatching at profits too soon.
I advised taking some profits in Logica and Trafficmaster. They have continued to rise.
Run your gains and cut your losses. That is still one of most important but least followed rules of investing.
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