LinkedIn (LNKD) Update

Original Recommendation


On Wednesday, May 25th I recommended to invest in LNKD using a dollar cost average plan.  You can click this link for the original write-up.  The excerpt below is a specific reference to the dollar cost average plan:


"LinkedIn will no doubt be a volatile investment.  Some days it will decrease in value a lot, and some days it will increase in value a lot.  Because of this, I recommend dollar cost averaging.  This is when you stagger your investments.  For example, if you plan to invest 1,000 dollars in LinkedIn, stagger your investments over a three month period.  Invest 333 dollars now, 333 dollars a month from now, and 333 dollars two months from now.  This will help you account for crazy price swings by averaging out your purchase price."


As it turns out, the price of LNKD has indeed been very volatile.  Check out the 2-month graph below.  Over a two month period, the share price decreased from $93 to $63 (32% drop), and then increased from $63 to over $100 (59% jump).

If you followed the dollar cost average plan that was suggested, you would have invested a third of your money on Wednesday, May 25th at a share price of $94.33 and another third on June 25th at a share price of $69.94.  Let's see the difference that this makes below:


Did not use dollar cost average method:  Your investment would have increased 8.5%.


Used the dollar cost average method:  You would be up 8.5% on your first 1/3rd investment, and up 46% on your second 1/3rd investment.  So, when taking into consideration that you would have only invested 2/3rds of your money, you would be up 18.16%.  And you would still have another third of your money to invest on July 25th!  The math is below:

8.5% return X 33% of the intended investment = 2.83%

+

46% return X 33% of intended investment = 15.33%

=

18.16%

In summary, despite only investing 2/3rds of your intended investment, the dollar cost average method yielded a return on investment of over twice that of not using the dollar cost average method.

LNKD Going Forward

I still believe LNKD is a good long term investment, and thus would recommend finishing out my original dollar cost average plan.  LNKD has been growing at a very rapid pace and is now the #2 social networking website in the world ahead of both MySpace and Twitter, but behind Facebook.  For more details read this article.