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Social Networking Grows Up

So many column inches were dedicated to the recent doomsday predictions that an alien visitor, landing at a newsstand, could be forgiven for assuming that a significant number of Americans were actually expecting the world to end on Saturday, May 21. Although enough believers existed to provide sufficient news fodder...

So many column inches were dedicated to the recent doomsday predictions that an alien visitor, landing at a newsstand, could be forgiven for assuming that a significant number of Americans were actually expecting the world to end on Saturday, May 21. Although enough believers existed to provide sufficient news fodder for incessant interviews, in actuality this bizarre cult only represented a tiny fraction of the population.

The apocalyptic prediction itself could hardly have been goofier (unless maybe it included a spaceship behind a comet) and less believable. My personal favorite detail was that the “Rapture” would begin at 6 p.m. local time everywhere—sweeping across human-created time zones one by one, presumably ruining the cocktail hour everywhere on the planet.

So why all the attention?

There’s a saying in journalism: “If it bleeds, it leads.” And there’s hardly a larger disaster than the beginning of the end of the world (apart, of course, from disasters that are actually happening, like deadly tornadoes).

Given my obvious contempt, why am I bothering to spill even more digital ink on the subject? Well, as you may have guessed, there’s a lesson here that’s surprisingly relevant to investing.

The financial media is no exception to the rule about bleeding and leading. Doomsday predictions regarding markets may involve significantly less literal blood, but they evoke the same emotions in readers as End-is-Nigh sandwich boards—primarily fear. Fear is a great way to get people to buy your newspaper, or click your link. Stories with headlines like “Why you need to get your money out of the market NOW” are daring you not to read them—at your own expense. And when people already are a little afraid, as they tend to be after a few down days in the market, they’re even more likely to seek out stories telling them what to fear and why. It’s a vicious cycle.

As you know by now, other investors’ fear can be your opportunity. I’m not talking about “buying the dip,” or searching for value in stocks others just don’t “appreciate.” No, the lowest-risk way to turn fear in your favor is simply not to succumb to it. Don’t open stories with sensationalist headlines. Don’t sell your stocks just because you fear losing money. (Do sell them if they actually start losing money.) And most important, stay optimistic, so that when the market starts going up again, you won’t have to dig your head out of the sand to notice.

It sounds easy. But in practice, people seldom follow these basic guidelines. When everyone else is afraid that prices will crash, it’s hard not to get afraid, too. People typically don’t like to stand alone, clinging to an opinion that almost everyone else seems to disagree with. When people get caught up in a crowd, they stop thinking rationally and allow themselves to be governed almost entirely by emotion.

In other words, don’t risk finding yourself in the shoes of Harold Camping, who, after the doomsday he had predicted failed to materialize (for the second time) said he was “flabbergasted.” He then proceeded to move his date another five months down the road ... this guy makes Nouriel Roubini look like an optimist.

One investing-related story dominating the airwaves and front pages recently has been the LinkedIn (LNKD) initial public offering (IPO). It’s attracted enough attention that it’s even been a hot topic of conversation among my tech industry friends—whose eyes usually glaze over at investing talk.

It should be a happy story—the IPO looked like a triumph for the company and a very bullish sign for the IPO market. But people look for, and put more weight on, information that reinforces what they already believe, while ignoring information that challenges it. It’s called reinforcement bias. So it’s not surprising that plenty of already skittish investors, and the journalists who write for the industry, managed to find a dark lining in this silver cloud.

You’ve probably seen assertions that the IPO’s first-day moonshot signals a “Web 2.0" bubble. You may also have heard someone allege that the IPO only did so well because the underwriting banks “underpriced” to enrich themselves and their cronies.

Either or both of those allegations could be true. Regardless, they generate plenty of hours of speculation and conversation, as well as newspaper sales and click-through rates. But neither will help you make money. The important lesson to take from the LinkedIn IPO, in my view, is that investors large and small really want to own stocks in the social networking space.

Social networking is one of the fastest-growing sectors of the tech industry. In fact, it’s expanding so rapidly that it’s constantly redefining the range of products and services it encompasses. Until recently, I was a social networking skeptic—Facebook was introduced when I was in college, so to me, it’s always been more of a toy than a tool. I couldn’t see how any of these companies were ever going to make any money.

But I’m coming around to the idea of social networking as a viable part of the tech industry, mostly because of how much it has evolved since we used Facebook to “Poke” each other in college. In just the last few months, I’ve begun to use Facebook anew for sharing and gathering useful and interesting information. My extended family now shares information through a designated Facebook group, and my Skee-Ball league announces events on its Facebook page.

Meanwhile, we’ve recently witnessed the ability of social media to spark significant political change, especially in Egypt and other Middle Eastern countries, where regime change has been dubbed the “Facebook Revolutions.”

Twitter facilitates personal interconnectedness in a similarly useful way. I use it when I want to know if a concert has started yet, or why there are so many fire engines down the block.

Soon though, I think, “social networking” will become an outdated label, as social and networking elements pervade everything we do online. (Like “recommending” stories on the New York Times website, and sharing information and articles through your Gmail status.)

Simply put, the social space is on fire. So far, ownership has been limited to a tiny cadre of venture capitalists and insiders. That’s why it’s no surprise to me that the LinkedIn IPO—most investor’s very first chance to own a piece of the social networking space—did very well. Does those investors’ seeming disregard for things like P/E ratios sound like a bubble? Maybe. But for now, there’s still far more demand for social networking-related stocks that there is supply. Until that changes, I expect to see more great things from the sector.

As to whether you should buy LinkedIn here, we generally advise against buying IPOs because the lack of trading history robs you of a key indicator of how the stock will do. And since there aren’t any other public social networking companies yet, I’m afraid I can’t recommend an alternative. But today’s Investment of the Week is a network, and it is taking advantage of another rapidly growing tech segment: mobile advertising. Geoffrey Eiten, editor of OTC Growth Stock Watch, recommended it on May 15, and the following excerpt was in the latest Dick Davis Investment Digest:

Global Traffic Network, Inc. (GNET) is the largest provider of traffic information reports to radio and television stations in Australia, Canada and the United Kingdom. In exchange for providing custom traffic and news reports, television and radio stations provide Global Traffic Network with commercial airtime inventory that GNET sells to advertisers. As a result, radio and television stations incur no out-of-pocket costs when contracting to use Global Traffic Network’s services. Through its wholly owned subsidiary Global Alert Network (GAN), the Company operates a national mobile platform that delivers automatic, audio news alerts to users’ mobile devices while driving. This safe, hands-free app pushes relevant and potentially life-saving information to the driver without distracting them. The app is currently free to download onto Android and BlackBerry devices. ...

“Based on its global reach and ability to target regional and national TV and radio markets, GNET has attracted world-class advertising from some of today’s most recognized brands. Companies who advertise with GNET include nine of the top ten Australian advertisers and 18 of the top 20 global advertisers as identified by Advertising Age. ... The company is in the process of securing in-app mobile advertising for GAN, and expects to begin generating revenues shortly. ... According to Magna Global, total worldwide mobile advertising revenues are expected to grow from $2.7 billion in 2011 to $6.6 billion by 2016. ...

“For the fiscal third quarter ended March 31, 2011, Global Traffic Network reported revenue of $26.8 million, an increase of 11% from $24.1 million reported in the third quarter of fiscal 2010. Net loss for the third quarter of fiscal 2011 was $0.2 million compared to net income of $0.5 million for the same quarter a year ago. The company’s revenue for the nine months ended March 31, 2011 was $83.9 million, an increase of 20% from $70.1 million reported for the first nine months of fiscal 2010. Net income for the first nine months of fiscal 2011 was $4.9 million compared to net income of approximately $300,000 in the year ago period. In addition to the continued and increased profitability of its Australian operations, Global Traffic Network’s United Kingdom operations attained profitability, while the company’s Canadian operations significantly reduced their net loss compared to the nine months ended March 31, 2010. Management anticipates solid growth to continue for the fourth quarter and fiscal year ending June 30, 2011. GNET continues to generate ample cash flow and maintain a solid balance sheet that has no debt and nearly $2.00 per share in cash.”

Wishing you success in your investing and beyond,

Chloe Lutts

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.