It was 2000. The first season of Survivor Premiered on CBS. The Super Bowl was still in January. I didn’t know what a Millennial was. Napster was peaking and the internet was exploding. I was a college student living in a house near the University of Minnesota campus with three beautiful women. I had fat stacks to invest in stocks and online brokerages made trading easy.
Actually, I had a few hundred dollars to invest, and that amounted to about 1,000% of my savings at the time. Regardless, I desperately needed to get in on the ground floor of the Internet Revolution. So, I opened up a Sharebuilder account and away I went. I wish I could say I jumped into Amazon and made a fortune. Instead, I got sucked into the stock that became the very symbol of the dot.com boom and bust. At least I learned some valuable lessons from it. Here are 6 things I learned from investing in Pets.com:
- Stocks can go to zero. I’m not stupid. And I wasn’t stupid back then. Of course I knew, intellectually, that stocks can go to zero. Of course I knew I could lose all the money I invested. But, that just won’t happen to me. It happens to other investors who don’t really think things through. It can’t happen to me. It’s this mindset that seems to be deeply ingrained in human beings, especially young humans. It’s probably there to keep us from being completely paralyzed by fear of all the potential dangers in day-to-day life or something. But it sure can backfire and cause us to do unnecessarily reckless things, like jumping into a stock because the smarmy sock-puppet spokes-dog is kinda clever.
- Dollar-cost-averaging doesn’t work with stocks that go to zero. Like a gray-haired gambler tapping max bet on nickel slots, I hit the buy button on Pets.com all the way down. I liked the stock at $12 per share. I should like it even more at a 50%, 75%… What?!? A 90% discount!?! What a gift! Load ’em up! You see, even back then, I knew about dollar-cost-averaging and cost basis. This was just a warped version of the concept, and I used it as an excuse to triple-down on an insane bet on an unproven company. Needless to say it didn’t work out for me.
- Companies are much more than a name. I thought Pets.com was a sure-thing because they snagged a kick-ass domain name. Look-out Petsmart. You’re done! Your internet domain, Petsmart.com has waaay too many letters. Now I know better. After all, just because I snagged the kick-ass crispycabbage.com doesn’t mean people are automatically going to flock to my site. I have to work at it with great content like this.
- Clever commercials are not a good reason to buy a stock. That sock puppet. That damn sock puppet. So clever. And probably a huge reason tons of retail investors like me chose to invest in Pets.com. In fact, if Pets.com was a brokerage site, they’d probably still be in business. Unfortunately, they sold chew toys and dog food, and they weren’t particularly good at it.
- Good companies know their customers. It turns out pet owners didn’t care to go online to get dog food and chew toys (at least not enough to keep Pets.com in business). You know pet owners, the people who are willing to wake up at 5 in the morning to walk their dogs in sub-zero temperatures and pick up their steaming poop. Pet owners. It turns out they’re willing to drive half a mile to Wal-mart pick up Purina too.
- You can tell a lot from numbers. Pets.com was never profitable. And it’s early growth was propped up by heavy spending on marketing. In fact, the sock-puppet’s salary was almost double that of company sales some quarters. Even a brief glance at the earnings report of Pets.com and I might have run the other way, but I didn’t bother to look. Internet bubble blinders were in full effect. Today, I dig into the earnings reports and conference calls before investing in any individual stock. After all, public companies in the U.S. have to disclose plenty of information to shareholders. Investors should take full advantage.
There you go. Six things I learned from my ill-fated Pets.com investment. The good thing is it didn’t kill my love for investing. And I still like to speculate (see The Short Stack), it’s just armed with much more knowledge and with a much, much, much smaller share of savings.
I am not an investment advisor. These are my opinions. Please do your own research before investing in any asset.
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