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Internet Stocks Appeal to the Few,
The Young, the Optimistic

By Gary Gentile  Fox Market Wire
A surprisingly small number of investors actually own Internet stocks and those who do have surprisingly high expectations for them.

That is one conclusion of the latest Index of Investor Optimism, a joint survey conducted regularly by PaineWebber and the Gallup organization.

The Index showed that:

Investors with less than $100,000 in investable assets are more likely to own Internet stocks than wealthier investors.

Only 15 percent of investors own or have owned Internet stocks.

Younger investors — those under 40 — say they expect returns of 30.6 percent in the next 12 months; higher than historical returns and higher than the expectations of older investors.

More than 50 percent of Internet company investors say they bought the stocks based on recommendations from family, friends, colleagues or advisers and 78 percent say they were aware of these companies because of media coverage.

The Index begs the question of whether these younger, more aggressive investors are justified in expecting such high returns. The investors surveyed for the Index do acknowledge that high returns are accompanied by high risk. And their relative youth suggests they invest in the Internet because they are so familiar with it.

"This is a generational issue," said Frank Drazka, director of technology investment banking for PaineWebber. "Take a look at our parents and grandparents and the stories they were investing in. People in college, people just out of college, are people who use email. It's, 'Go with what you know.' They are investing in companies that today are their retailers, their means of communications."

But it's just as likely, of course, that young investors are simply not as seasoned as more experienced investors and have expectations that will be dashed when fundamental rules of stock valuation reassert themselves.

"This is like nothing we've seen in our lifetime and yes, it is changing the way we live and work and communicate," said Scott Bleier, chief investment strategist at Prime Charter Ltd., a New York-based brokerage firm. "But in order to participate in these stocks and make money, you have to put aside the discipline that has kept you in the business for all these years."

Drazka says younger investors are adopting new valuation methods for Internet stocks, not out of ignorance or wishful thinking, but because they recognize the "fundamental shift" taking place in the economy — a shift away from traditional technologies and toward the Internet.

"Our children are surfing the Web at night as opposed to watching cartoons," he said. "This is truly a behavioral shift toward an interactive medium. This will be what our children know. This is not a fad. This is not a trend."

Young investors may be justified in expecting higher return for bearing higher risk. And they may be more confident in new technologies mainly because of their use of them. It remains to be seen, however, if these investors will retain their confidence should a market correction occur.

"While younger investors can generally tolerate greater risk, there is cause for concern given that their expectations for the markets are considerably higher than historic returns," said Mark Sutton, president of PaineWebber's private client group.

So far this year, higher expectations have been justified. This week has seen record highs in the technology-rich NASDAQ market, with RealNetworks and Doubleclick seeing double-digit growth on Tuesday. But Bleier thinks that when option contracts expire at the end of this month and cash from hastily-opened IRAs dries up, Internet stock prices will come more in line with reality.

"It's getting too easy," he said. "We are now in the realm of the emperor's new clothes."

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