Uncertainties in Sectoral Investment Decisions - Part 2
In Part 1, we discussed the crucial aspects that are often overlooked when making sector-based investment decisions, and we went through one of the most famous instances— the Dot-Com Bubble. From so-called prominent players to authentic value builders, we examined them all. If you haven't had a chance to read Part 1, or if you'd like to revisit the insights discussed, feel free to click below:
Explaining how psychological uncertainties impair your ability to make money
Discussing the course of action we should follow.
The story of pets.com & Webvan: what does it tell you?
Pets.com: As I mentioned in the previous part, Pets.com was like today's Amazon for pet-specialized products, such as food and accessories. The company spent a massive amount on marketing that worked for them to gain widespread recognition. But, despite heavy spending, they struggled with fundamental problems. They failed to offer the products at the right price due to high shipping costs. This issue forced them to sell products at low margins. Customers saw little to no benefit in buying online instead of from local shops. Even the most affordable pet food was expensive. The company often sold the products at a loss to attract new customers and also to retain existing customers. This severely affected their ability to achieve profitability. We cannot deny the fact that they became popular through advertisement and other marketing strategies. However, it is also true that they never achieved profitability. In 2000, they raised $82.5 million from IPO. They burned through cash rapidly and went bankrupt just 9 months after their IPO.
The story of Pets.com teaches you not to chase attractive advertisements or social media hype. It emphasizes the importance of a strong business model rather than just hype and fund flow.
Focusing on aggressive marketing without addressing the underlying challenges will not remove the strain on fundamentals. In this case, high shipping costs were a major issue.
Right pricing and competitive edge over peers determine profitability and sustainable growth.
Webvan: As we know, Webvan was once a well-known online grocery delivery company. It promised same-day delivery services. It was known for delivering groceries within 30 minutes. It expanded aggressively. Did you know that it even spent $1 billion to build numerous warehouses in multiple cities before proving its business model? Reports indicate that it built costly infrastructure in 26 cities, anticipating rapid growth and assuming high demand for its service. As we know, it raised $375 million through an IPO in 1999.
The story of Webvan makes it clear that excessive spending on expensive infrastructure before securing a stable customer base not only depletes cash reserves rapidly but also leads to bankruptcy.
Its profitability was hindered by logistical and supply chain challenges the company faced at the time. Such a business model requires large warehouses, delivery fleets and complex supply chain solutions.
At the time, online grocery shopping adoption was stagnant and remained low. Most people preferred grocery shopping from local merchants. Despite weak demand for the service, Webvan continued to expand aggressively.
Pets.com failed due to high marketing expenses without focusing on its core business and logistical challenges, such as high shipping costs, whereas Webvan failed due to overexpansion, spending excessively on logistics infrastructure development without creating sufficient demand for the service.
The greatest threat to wealth creation: FOMO, Overpaying, and Loss Aversion.
Uncertainty in sector-based investment decisions often amplifies emotional biases, leading investors to make irrational choices. The fear of missing out (FOMO) drives many investors to chase overpriced stocks, while loss aversion prevents them from cutting losses or averaging down even when valuations justify it. Instead of relying on fundamental analysis, many investors make costly mistakes—neither buying nor selling—by getting swayed by short-term price movements. This emotional reaction undermines wealth creation, as successful investing requires discipline, patience, and a focus on long-term value rather than short-term market fluctuations.
Mental Uncertainties:
Wealth creation is not everyone’s cup of tea. Building wealth through the stock market, in particular, is often a complex task. Yes, it's not just about the fundamentals or buying the right stocks. There is something beyond that, which is regarded as controlling emotions. If you can't control your emotions, there is no point in spending countless hours learning the fundamental principles of value investing and valuation techniques.
Have you ever felt an internal urge to buy popular stocks that frequently appear in television headlines as hot-performing stocks? Hearing that Company Alpha is up 20%, 30%, or even 50% in a month might trigger strong reactions. Your friend might then tell you that he has also invested in those stocks. These events can give you FOMO, which is the Fear of Missing Out.
The fear of missing huge rewards may lead you to neglect researching its business and fundamentals, making you blind to its valuation. In fact, you don't even hesitate to overpay, even at 100 times earnings—P/E = 100—for sure. If the earnings are not sustainable or if the company is not performing up to market expectations, the stock price will plummet.
The P/E ratio tells us how much investors are willing to pay for each unit of a company’s earnings based on market expectations. If the P/E of a target company is higher than its peers, it might be relatively overvalued. If its P/E is lower, it might be relatively undervalued. However, the P/E ratio alone does not provide the full picture. A high P/E could also reflect strong growth expectations, while a low P/E could indicate potential underlying issues or risks.
Hence, the connecting dots are simple to comprehend. Your unstable emotional behavior causes you to FOMO; FOMO hinders your ability to think rationally and poisons your decision-making skills, leading you to overpay for stocks. Buying stocks at peak valuation can result in a severe crash when the market is disappointed with the company's earnings or industry trends.
During a crash, the market gives you a second chance to correct your mistakes—an opportunity many fail to recognize. Start assessing the fundamentals and corporate governance, determining whether the stock is undervalued or overvalued (not just by the P/E ratio). If undervalued, buy more shares and bring the average price below fair value, provided there is nothing wrong with the company's fundamentals and corporate governance.
But do you know what? Many people won’t do that. Instead, they will either panic sell or hold onto the stock—neither buying nor selling. They fixate on their buy price and refuse to sell or buy below it, regardless of changes in fundamentals. Such behavior is driven by psychological and other related factors. This is known as ‘Loss Aversion.’
“Loss Aversion”
Loss aversion means people feel the pain of losing something more strongly than the happiness of gaining something of the same value. For example, losing $100 hurts more than the joy of finding $100. This can lead to poor decisions, like holding onto bad investments too long or selling good ones too early out of fear.
Let's get back to the story of Cisco once again to learn an excellent lesson on how to approach and perceive a crash to utilize a second chance.
Cisco: During the 1990s, Cisco became a dominant player in networking hardware equipment such as routers and switches. Its growth was fueled by the dot-com boom, which increased the demand for Cisco products as more businesses rushed to build online infrastructure. The company's revenue soared due to growing demand, while its stock price increased rapidly due to excessive speculation in the market. In March 2000, Cisco became the most valuable company in the world, with a market cap of $569 billion. What an achievement!
However, the reason behind the event was the most common thing in the stock market—massive speculation. Yes, it had a competitive advantage in internet infrastructure products, and its fundamentals were good as well. However, Cisco’s stock was traded at a high price.
In 1995, the stock opened at $1.30 and closed at $2.77. By 1999, it had surged up to $35.74. In the first quarter of 2000, at the peak of the bubble, the company's stock price reached approximately $80, making it the highest valuation. When the dot-com bubble burst, it went all the way down to $8— a 90% fall from the peak. At present, it is being traded at $64, which is still 20% below the peak
Here, I want to come up with an example of two brothers, Ramesh & Naresh, who entered the stock market in early 2000 and invested in Cisco at its peak price and considered it a safe bet.
Both Ramesh and Naresh experienced FOMO over huge future gains from internet-based companies during the boom. So, both opened individual trading accounts, and each decided to invest $1,000 in Cisco at an average price of $76.9 per share in early 2000. They bought 13 shares each, assuming each share would go above $150 in the future. But the exact opposite happened. The bankruptcy of many internet-based startups and the unprofitability of many other companies affected market sentiment, leading to a huge market crash. In March 2000, Ramesh and Naresh both faced a severe decline of 32% in their investment in Cisco.
Ramesh stumbled and panic-sold all 13 of his shares at an average price of $52.3. He exited the stock market and decided never to return. While Ramesh left the market, Naresh held onto his investment to avoid realizing a loss.
As the market crash deepened, Cisco's stock continued to decline. By the end of 2002, the stock price had fallen to around $10 per share. Naresh watched his $1,000 investment in Cisco shrink to just $130 but refused to sell or buy. He was hoping that he'd recover his initial $1,000 someday.
Meanwhile, Ramesh, who panic-sold at $52.3, never re-entered the market after witnessing his brother's agony. Over the next two decades, Cisco recovered but never returned to its 2000 peak. Today, in March 2025, it trades at $64, leaving Naresh’s investment still approximately 17% below his initial cost in real terms.
Both brothers fell into psychological traps—Ramesh’s loss aversion pushed him out of the market, causing him to miss future opportunities, while Naresh’s loss aversion kept him holding an extremely overvalued investment for decades without selling or buying more shares at a lower price. Their story highlights the dangers of speculation, panic-driven decisions, and ignoring fundamentals—lessons that every investor must learn to avoid costly mistakes.
The fundamentals of Cisco were strong, and if each of them had decided to accumulate shares at $10 with another $1,000 investment instead of panic selling or just watching their portfolio without taking any action, each would have bought an additional 100 shares. This would have brought each individual's total investment to $2,000 with a total of 113 shares, lowering their average price to $17.7 per share. With a total investment of $2,000, their profit would have been $5,232 (as of March 2025, Cisco’s stock price is $64 now)—a return of over 260%. It may sound like a massive return. However, it is important to note that this return is over 25 years. This yields a return of 5.3% CAGR over the years, which could be considered fair, as it beats the U.S. average inflation rate by 2-3%. This example clearly highlights the importance of emotional control in investing.
But, you know what? The second chance does not always benefit you. Read further to understand the reason.
Overpaying Eliminates Your 2nd Chance:
Remember Ramesh and Naresh, even if they could have managed to overcome loss aversion and buy more at lower prices, there would not have been any certainty of good long-term returns. Imagine if the price of Cisco shares hadn’t fallen beyond 35% and stayed almost flat for a decade at $50, reaching $64 per share as of March 2025? They couldn't even produce a gain by reducing the average stock price—through dollar-cost averaging (or SIP in stocks) or buying more at lower prices.
This example clearly implies how dangerous it is to invest in an extremely overvalued company, regardless of fundamentals. This is why I say the second chance does not always have a 100% success rate—it could be 60%, 50%, or even 20% chance depending on various other factors such as new average stock price, volatility, earnings growth, and other psychological factors, etc. Also, accepting mistakes and realizing a loss can be a good move depending on the circumstances.
The reason I write a bit deeper on behavioral economics is to emphasize the fact that mental uncertainties double the struggles and challenges, especially during a market crash—resulting from sector-specific trends and speculation.
Search Engine Battle: Yahoo vs Google.
Story of Google & Yahoo : In the early days of the internet, Yahoo was the leading search engine, starting as a web directory in 1994. However, it focused on becoming a web portal with services like news, email, and finance instead of improving its search engine. Meanwhile, Google which was founded in 1998, created a better search system called PageRank. It gave more useful results. A big mistake by Yahoo was relying on Google for search technology from 2000 to 2004 that helped Google grow. By the time Yahoo tried to take back control by buying companies like Inktomi and Overture, Google had already launched AdWords, a better way to make money from ads.
After the dot-com crash, Google pulled ahead with a simple, fast homepage with a strong focus on search. In 2004, Google's stock market launch showed its growing power, while Yahoo struggled with leadership changes and bad decisions. Even though Yahoo bought companies like Flickr and Tumblr, it could never catch up in search. Google's constant improvements and smart business moves kept it on top.
The story proved that being the first in an industry doesn’t always mean staying the leader especially in the tech field—what really matters is staying ahead with better ideas and execution. Hence, we need to understand that even being so-called prominent players in promising industries—the un-proven promising industries—is hugely uncertain in the first place.
Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.
He drew those two morals from the broad examples of airlines in the late 1940s & early 1950s, and the attractive computer industry companies—all of which were unprofitable except IBM.
It’s important not to let television or social media endorsements dictate your investment choices. Instead, focus on analyzing a company’s business model, fundamentals, and performance rather than just its marketing efforts.
If a company is getting more funds again and again from major investors or leading venture capitalists, it doesn't mean that you can also cash in and buy shares without understanding what the company is doing and how it's doing it. We must understand that start-up companies often receive repeated investments in anticipation of huge rewards. However, not all companies can deliver on those expectations. There are significant uncertainties, especially in Small and Medium-sized Enterprises (SME) stocks.
It is necessary to be aware of cash outflows in the company you are looking to invest in. The cash flow statements and annual reports are sufficient to tell you where they spent cash and why they spent it. Always look for interconnections between cash flow statements, income statements, balance sheets, and annual reports for a clearer picture of the company. (Note: I assure you that I’ll explain how to do this in the future as I gain more readers.)
Behavioral awareness is crucial in investing. Understanding psychological factors will not only make you aware of their impacts, but it will also help you study, assess, and control your own emotions—allowing you to make rational and unbiased decisions. You will start recognizing the uncertainties—facts you may have neglected or failed to observe beforehand—especially in your target sectors when there is a downturn in your portfolio.
In my opinion, when you concentrate all your funds in a specific sector—without diversification or studying underlying fundamentals—especially in prominent players you believe have a strong future or high growth—your investments are subject to shocks that can mentally distress you when returns turn negative. This amplifies psychological uncertainties and leads you to make poor decisions again when there is a significant drop in stock price.
No matter how attractive an investment seems, never overpay for stocks. Remember, the price is what you pay, and the value is what you get. Dissolving FOMO in your mind is the first step in a successful investment journey.
There are many possibilities that even the market leader today may not be able to sustain its position. There is no reliable or proven way to predict which company will succeed and which will not—even in industries that appear to have great potential. All we can do is study its fundamentals and business model, scrutinize its management, and buy at the right price. As far as I know, this is the only historically proven way that exists.
Always develop the habit of paying attention to historical events. Even when analyzing a company, gather the resources without noise—which includes the past, present, and future—to get a complete picture of that company. How you do that is up to you. You have to read more, practice it, and develop your strategy. If you're serious about value investing, there is no exception for you. Remember, we can't make significant money without effective measures to achieve it.
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⚠️Disclaimer: The Value Investor's Lab is dedicated to providing educational content to help readers understand the principles of value investing. We do not promote or recommend specific companies, securities, or investment strategies. Readers are encouraged to consult registered and approved financial advisors for personalized investment decisions.
Thank you for sharing this wonderful post. The stories of Pets.com and Webvan highlight the dangers of prioritizing hype over a solid business model.
Pets.com burned through cash on aggressive marketing but failed due to high shipping costs and unsustainable pricing.
Webvan overspent on infrastructure without ensuring demand, leading to bankruptcy.
Key lessons:
A strong business model matters more than hype.
Overexpansion and excessive spending can kill a company.
Emotional biases like FOMO and loss aversion lead to poor investment decisions.
Buying overvalued stocks can eliminate second chances to recover losses.
Market leaders can lose dominance if they fail to innovate (Yahoo vs Google).
Successful investing requires discipline, patience, and rational decision-making based on fundamentals, not emotions.