Nov 27 2007
Justification for Ditching Google
I got out of my Google stock just before the end of October, at the beginning of what would later be a $100 slide in share price. I just had a feeling that the super returns I had gotten over the last two years were about to evaporate.
Now I don’t pour over the Google earnings announcements, or go stalking the company’s Mountain View HQ, but my hunch about the stock seemed to be right (for once) so I’ve been looking for justification for the move since.
I finally found it at VesTopia, where one writer explains why he too ditched the stock. The takeaway is two-fold: Google was gearing up for a mean-reversion for its performance and inflation of its keyword rates was driving earnings faster than new products.
The mean-reversion argument is of particular interest to an economist. The idea is that any performer that exhibits an above-average return or outcome will eventually end up performing about the same as everyone else.
I’m not sure I totally buy it from a statistical perspective, but my gut surely agrees. The real question is when exactly a company will begin executing its mean-reversion. I wish I knew better!
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[…] The difference is important. The Dow Jones Industrial Average, for example, is a price-weighted average portfolio, where the degree of holding represented in the portfolio is proportional to each company’s share price. The Dow-style portfolio has four times as much invested in stock XYZ than ABC just because XYZ’s share price is four times that of ABC and XYZ dominates the average. For an Internet index, that spells Google (see why V ditched the stock). […]