Losing Sleep over Internet Stocks?
Chart of the Week for September 24-30, 1999
It is now impossible to have a casual conversation about investments without it turning to the topic of high-flying internet stocks. The news on these companies is usually tantalizing. And why not follow it, technology changes daily as does the way we do business. If you don’t believe our world is changing, just ask any of the 19 new members on Fortune’s 400 richest Americans list who made their riches through internet-related businesses.
These stocks, however, are not always fun and games for investors. The chart above compares the standard deviation of TheStreet.com Index of internet stocks and the S&P 500 Index over rolling ten-day periods. Standard deviation is a statistical measure of variability of return, which is one dimension of risk. Roughly 95% of all observations are captured within two standard deviations around the average. For example, consider an asset with an average annual return of 8% and a standard deviation of 10%; 95% of all observed annual returns would fall between -12% and 28%.
The standard deviation of the S&P 500 is relatively stable since its daily returns this year have been roughly within a two percentage point band around its average daily return. TheStreet.com Index, however, has daily returns that fluctuate dramatically around the average daily return, indicating far greater relative volatility.
What does this mean to you? It means that as quickly as some short-term investors make money, they can lose it even faster. Of course, daily volatility is far less of a concern for the long-term investor.
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