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Chapter 9. The Next Big Thing: New Businesses and Young Companies

Chapter 9. The Next Big Thing: New Businesses and Young Companies

In Search of Bargains

Gus prided himself on finding bargains. He had bypassed realtors and found a cheap apartment to rent in New York City by contacting landlords directly. He filled it with antiques that he found in small furniture stores at bargain prices. He ate only in restaurants that had never been reviewed by The New York Times, based upon word of mouth and his own research. Heartened by his success at finding bargains, Gus decided to apply the same strategy to his investments. He began by looking for stocks in small companies that were not followed by equity research analysts at any of the major investment banks. He expanded his search to look at companies that were planning initial public offerings and requesting shares in them; lacking the time to do analysis, he chose a dozen at random. He even considered investing some of his money in a friend's new venture that sounded promising.

Even as he made his investments, he noticed that he paid much more than the listed price; his broker mentioned something about a large bid-ask spread. In the weeks after he bought the stocks, he also noted that there were days when these stocks never traded and the prices remained static. He also noticed the stock prices moved a great deal when news announcements were made and that prices were more likely to drop than go up. When he tried to sell some of the stocks on which he had made money, he found himself getting less in proceeds than he expected. Gus decided that his strategy, which worked so well with apartments, furniture and restaurants, did not work as well with stocks and he was not sure why. He blamed his broker.

Moral: A bargain can sometimes be very expensive.


Chapter 7 looked at a strategy of investing in publicly traded companies with good growth prospects. While the payoff to picking the right growth companies can be high, it is difficult to acquire these companies at reasonable prices once they are recognized as high growth companies. Some investors believe that the best investment opportunities are in small companies that are not followed by analysts or in firms before they become publicly traded. They argue that investing in young firms and in new business, either when they are private businesses or when they first go public, is the best way to generate high returns. In this chapter, the potential payoff (and costs) associated with these strategies is explored.


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