Twelve years ago, a total of $5 trillion in
market value was lost when the "Dot-com" bubble burst. Many investors lost their life savings, their kid's college funds, or their retirements as a result.
Flash-forward to today, and I'm convinced many investors are running the risk of making the same mistake that caused those trillions of dollars in losses a decade ago.
Let me explain...
You've undoubtedly heard about the new multi-billion dollar "Web 2.0" companies like Groupon, Zynga, LinkedIn and Facebook. The mainstream financial press can't get enough of them...
For the past several months, investors have been blindly throwing money at these companies.
Take Zynga for example. Zynga is up 25% since it started trading back in December... but the company doesn't even turn a profit.
In fact, Zynga has lost $400 million during the past year. The firm's net loss came out to $1.40 per share... or more than 10% of its current share price.
LinkedIn (Nasdaq: LNKD), a social-networking site for professionals, is up slightly since going public. But it's been a wild ride. The stock trades at a P/E over 800.
Groupon (Nasdaq: GRPN) doesn't even have a price-to-earnings (P/E) ratio... because it has no earnings. In the past year, the company has lost $350 million or $0.97 per share.
Facebook -- considered to be the "hottest" of all these companies -- hasn't gone public yet. At this point, we can only guess what sort of enormous valuation it might see. Estimates are calling for a valuation of $100 billion. With net income of $1 billion in 2011, that means the stock could sell for 100 times earnings.
And not only do these stocks trade at ludicrous valuations, but they are tremendously volatile.