Stockmarket education from eBay

2006 wasn't a great year for me investing-wise. eBay, my second largest holding, got hammered, the US dollar declined against GBP and nothing else gained enough to counteract those two negatives. So I ended up losing over 10% in my growth portfolio.

So what was I thinking when I bought more eBay in early 2006 at $44?

Firstly I did not think eBay was only growing at 20%. Because of aquisitions it looked like it was growing at 35% which made the forward multiple of 45 look reasonable.

Secondly I was still obsessed with how far eBay had fallen from it late 2004 high of $56 and didn't think it could fall much further.

Thirdly I thought eBay had such a great business model it would be impossible to lose in the long term.

I may still be right on that third point but the fact is that great businesses can still have a declining share price for several years.

12 months ago my worst case scenario for the eBay share price now was that it would drop to $40. That was assuming a trailing PE of 45. Now, 12 months on, eBay is on a trailing PE of 30 and that is after meeting its 2006 guidance.

I guess the lesson is to stay aware of the risks of buying stocks on high multiples and not to assume that share prices will eventually return to their recent high.

So what could work for eBay in 2007? Skype's revenue could become material, which would impress all the doubters who still thing eBay paid too much for it. PayPal could continue growing at 40% and advertising revenue growth from the classified sites could accelerate.

The downside should be limited from here for eBay but I have thought that before!