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New Media, Old Story: People Want To Get Rich Quick

By Laura Kane

Source: The Vancouver Sun

Rush to jump on LinkedIn bandwagon creating feelings of deja vu

Whether he’s teaching executive workshops or MBA students, one of the first things University of B.C. marketing instructor Paul Cubbon does is give a quick lecture on the dotcom boom and bust.

“I ask them, ‘What are the insights here?'”

The lesson is there’s nothing new about people thinking they’re going to get rich quick, whether they’re investing in technology, housing or tulip bulbs, which briefly became more valuable than a luxury house in 17th-century Holland.

“These speculations are partly people wishing they could make money easily.”

LinkedIn’s recent initial public offering -which saw shares soar 109 per cent on the first day of trading, and valued the company at $8.8 billion -has raised fears of a new “tech bubble” akin to the investment frenzy that led to the dot-com meltdown of 2000.

Although enthusiasm has subsided a bit for LinkedIn, with shares down to $94.33 Wednesday from $122.70 on the first day of trading on May 19, the blockbuster IPO is giving analysts a familiar feeling.

At the height of the dot-com boom, many Internet-based companies were generously valued despite their earnings.

Yahoo and Netscape both saw their share prices double in their public offerings in the mid-’90s. By 2001, Yahoo stocks had tumbled to $17, down from $150 at their peak.

The fervour around LinkedIn is partly due to pent-up excitement, Cubbon said. The company is the first of the major social media companies to offer an IPO, and people are eager to invest.

“It’s based on what people think they might be able to generate as revenue in the future,” he said, noting a gap between the revenue streams and profit projections.

Investors are clearly betting the company will show spectacular growth. LinkedIn is trading at about 554 times last year’s earnings of $15 million. The company posted losses in 2008 and 2009.

LinkedIn serves about 100 million users and runs on a “freemium” business model. The majority of users create free profiles while a small percentage choose to pay a subscription fee for a premium account.

The unique value of social media companies is the number of people they reach and their ability to mine users’ data, analysts say.

Advertisers can target individuals based on information gathered from their profiles.

“One of the things that makes LinkedIn quite different than some of the consumer models is that the value of your audience is much more lucrative,” Cubbon said.

“For a recruiter, being able to target job-seekers is very different than promoting a candy bar on Facebook.”

Cubbon said he expects social media companies to grow, but at a slower rate than investors are counting on.

“The issue is not will we move that way directionally, it’s how fast -and how long people will wait for their money.”

Some of today’s most prominent Internet companies experienced very slow growth.

Amazon’s 1997 IPO valued the company at $54 million, but the online bookseller did not turn a profit until 2001.

“E-commerce is a mainstream part of business today. There’s a difference between investment expectations and what actually happens to the business. Business is going to grow,” Cubbon said.

Investing in social media companies at this point is a gamble, said David Chalmers, a financial adviser at Nicola Wealth Management.

“People should not be investing a serious amount of money in something highly speculative,” he warned.

“You could also go to Las Vegas and put your money on the roulette table. You might win or you might not.”

John Clark, president of Pacific Spirit Investment Management Inc., also said the current frenzy was reminiscent of the dot-com crisis.

“I think there are overly optimistic expectations for these companies,” he said, noting a lack of supply of social media companies for people to invest in.

“If LinkedIn can make it to the market and be the first -and there’s a lot of demand in that area of the market -it can push the prices up.”