Let me take you back a few years, to the glory days after World War II. After a tough fight, the soldiers came home to live quiet lives and start families. They were treated well for the most part because you dont short-change real-life heroes with combat experience. Unions thrived as manufacturing took off, wages were high, and the middle-class grew and grew until it spilled out of the city into the suburbs.
Many of those families bought into the stock market. The goal for the majority of investors was to put their money somewhere safe, where it would appreciate slightly faster than in the bank. You held onto that stock forever, staying with your companies through good times and bad times, getting little dividends here and there as a reward for your loyalty and support.
Flash forward to 2004 where those same great companies are being plundered and devalued by a growing legion of speculators who are looking to make a quick buck off the natural fluctuations of the stock market.
Remember Nortel? Before the bubble burst, when everyone was investing in technology not all of it practical or even functional Nortel climbed to a high of US$124.50 a share. After the bubble the stock took a nosedive and for a while lived as a much undervalued penny stock worth less than a dollar. People like my mom, who inherited a good size chunk of stock from when the company was still Northern Telecom, were wiped out by greedy speculators.
Speculators built the bubble, and rampant, irresponsible speculation popped it.
Now Nortel shares are worth about $3.54, after spending years in the cellar. To get back to that modest standing, the company has had to lay off more than half its workforce and sell off key business segments, temporarily boosting profits but at the same time ensuring that it will never reclaim its former glory.
Even if Nortel had a chance to improve its position, I doubt the speculators would let them.
Why? Because right now the stock is a bargain, and severely undervalued when you consider Nortels billions of dollars in assets and revenues. You can buy a lot of shares at about $3.50 a pop. Say youre a speculator and buy 10,000 shares. Say the price of the stock again goes up to $8.50, the stocks high for the last 52 weeks. Every time the share goes up a dime, you make a thousand dollars, and by the time it gets to the $8.50 mark youve more than doubled your money after taxes. So what do you do then? Hold onto the stock, hoping the company will continue to grow?