Reverse Psychology

Despite occasional surges in the stock market, the trend has mostly been a downward spiral of gloom and despair. The technology-drenched Nasdaq has plummeted more than 25 percent this year. As a result, investors have been running for shelter. But that flight to safety is a little backward.

A year ago, when stock prices were sky high, investors were loading up on risk, justifying enormous valuations even though the stocks could–and did–lose most of their value. Ordinary investors were clamoring for a piece of that riskiest market—initial public offerings.

Now investors distrust tech stocks even though they’re at more normal prices, and therefore, have less potential to plunge. Few IPOs can come to market, and individuals shun them. How risky is an investment in Cisco Systems now, with its stock around $13, compared with a year ago, when its stock was at $72?

That kind of counter-intuitive psychology is typical. So here’s a thought: Put a little risk in your portfolio, just a tiny bit. And be willing to hold on for a year or two, instead of looking for a two-month payback. The tricky part may be holding onto the stocks for the long run, trying not to react to the latest story on the Web or to CNBC chatter, but it can be done.

“There’s a pretty strong herd mentality among investors. It can be hard for the individual to buy when everyone else is selling,” explains Pat Dorsey, director of stock analysis at investment tracker Morningstar.

If you have the urge to run with the herd, just think of all the investors who did so a year ago, loading up on high-priced tech stocks. And look what happened to them.

Outpost

It takes much more than a nifty ticker symbol to succeed in this market. That’s the reality Outpost.com faces this week. The online consumer electronics retailer reported a fourth-quarter net loss of $9.5 million, and announced that it is exploring “all available options.” The company, formerly known as Cyberian Outpost, said it will also be taking a number of “cost reduction actions.”

“Current market conditions have made it difficult to secure the required equity and working capital financing we need,” stated Outpost Chairman Darryl Peck. “Therefore, we intend to meet with our creditors to discuss payment options.” Forrester Research analyst Steve Zrike says the announcement indicates a bit of hopelessness on Outpost.com’s part.

“It certainly sounds very ominous, they aren’t making any projections and wording like ‘we’re keeping our options open’ is usually a bad indication,” says Zrike. “The bottom line for all of these free standing dot-coms is whether can they prove to the money people that they’ve got a model that will generate a profit in the long-term, and from what it sounds like, they haven’t been able to do that.”

Outpost gambled a lot of money up front to acquire customers but had a hard time translating them into a healthy profit base. And, as a pure-play company, it has had to rely on advertising to get the word out. “It doesn’t have any physical presence in the marketplace — you don’t see their store signage, nor do they have a catalog,” says Zrike. “To get in front of you, they have to advertise, and that’s a lot of money.”

But all is not necessarily lost for Outpost.com, which Zrike credits with having one of the best e-commerce sites in terms of functionality and design. The company’s best bet may be to find an established electronics company to buy them or partner up, Zrike says.

“Many electronics bricks-and-mortar players have e-commerce operations, but only reluctantly, and don’t have the competencies, or technologies, or interest, to invest and spend a lot of money on state of the art platforms and customer service tools,” Zrike says. “Outpost is a very good site based on our testing, and could be very good for a player who would rather have someone else worry about e-commerce.”