Every hot stock chills out – at least for a while.
Why? Market securities analysis scholars have labeled this as the “shitus happenus” theory. And it tends to surface with predictable and unpredictable events:
- Analysts once again discover that exponential growth doesn’t continue forever (who would have thought?!) and hammer the stock.
- A new competitor flexes its muscles and everyone gets scared.
- The financial news media gets bored and runs to the next shiny suitor.
- An insider trading or back-dating options scandal breaks.
- Another recession hits.
- The stock’s market sector falls out of favor.
- A natural disaster wipes out the company’s supplier base.
- The CEO, and his cult of personality, leaves for a higher-paying opportunity.
- The chairman is caught in an affair with his assistant.
Show me a stock that has done nothing but ascend month/month or even year/year over the last 10 years, and I’ll take back my claim that the perfect stock does not exist. Then I’ll buy it.
The longer a stock’s success streak, the more everyone who does not own the stock wants it to fail. Analysts, brokers, mutual fund managers, and even company insiders are just waiting for that little nugget of news that shows the smallest crack in the stock’s once impenetrable armor. Quite suddenly, that crack is ripped open, with the guts of twinkly-eyed amateur investors spilling all over the stock exchange floor. “Told you so”, the talking heads will say, ad nauseam.
The hotter a stock is, the more likely it is to fall hard.
Over the past few decades – those perfect stocks have tended to have a strong tech theme – IBM, Microsoft, Yahoo!, Google, Facebook, and Apple – but the phenomenon is not exclusive to the sector.
I cautioned everyone about the Facebook IPO. Why? I knew amateur speculation would be rampant because so many people use Facebook – inflating the offering price – and a lot of amateurs would jump in right from the start. Meanwhile, everyone else wanted the IPO to badly fail. Something had to give. If you bought it on day one and given up hope just 3 months later, you would have lost about 60%.
The tips I gave in that Facebook article are relevant to any “perfect stock” you are considering buying.
The best investment is almost never the sexiest or even beer-goggle justifiable investment. It’s the boring, rock-solid Dividend Aristocrat stock that everyone forgot about, it’s the REIT that none of your buddies has heard of, or it’s the commision-free ETF that pursues a passive index strategy. It’s usually the one that nobody you know has even considered.
As with any so-called personal finance shortcut – when that next familiar, hot, or perfect stock comes along, you’d probably be best off to stay away.
I agree with you but to a point. What sometimes drives meteoric rise of a stock is the idea of “newness.” With Apple, this “newness” brought a lot of people into the stock who normally don’t invest in stocks (i.e. grandma or twinkly-eyed amateurs) and it scared a lot of Wall Street investors (hence the downslide).
Was Apple a good investment at 700 a share? Not if you are thinking short term. That’s a pretty expensive expensive stock. Was it a good investment in 2000 when Apple was making gumdrop computers? Yes. Looking at a graph of their stock value, however, an investment wouldn’t pan out for at least 7 years if you had initially invested in 2000. It really comes down to fundamentals. Do you believe the company is innovating even if they haven’t caught on with a lot of people yet? It’s especially amazing to see large, older companies suddenly shift gears and become incredibly innovative like Apple did in the late 1990’s or Ford did in the mid 2000’s.
So it depends on perspective. If you had bought Apple in 2000, you’d call it the perfect stock. The stock’s general rise upward is in perfect sync with a company making a lot of money and innovating. However, when you and your friends got on board, it was too late.
Having said all though, I completely agree that for most people investing in cheap index funds is the way to go. It’s the only kind of mutual fund I own. However, adding to that a few highly innovative (and VERY CHEAP…Apple isn’t cheap anymore) stocks doesn’t hurt either. It is about understanding the company’s fundamentals (both the numbers and the industry) and making a decision to invest (give money to the company to get better over the long term). Investing in a company means long term. But we want immediate gratification. For most amateurs and pros alike, immediate gratification is their MO.
In any case, in answer to your challenge, I’ll give you a stock: Berkshire Hathaway. If you look at the man who owns that company and his philosophy on investing, you’ll understand why it’s growth has been stable (not meteoric like Apple), but stable and consistent. That’s the stock I wish my parents had bought 30 years ago. Apple would have been decent too though.
Buffett for the win! It’s hard to dispute that Berkshire has been a great stock. Perfect? Far from it. But rock-solid due to stellar management? Absolutely. And that’s the key. Berkshire is not a sexy, shiny stock – but it’s one you wouldn’t be ashamed to take home to mom.
Right on brotha
I am one of those people that bought Apple during its meteoric rise. I do feel I bought too many shares, but I’m a long-term investor so I will balance my portfolio by focusing on some index funds.
Definitely want to stress that this post was not to single out Apple and Apple purchasers. More so, I wanted to squash the notion that sexy stocks, a la Apple 2011, Microsoft 95, etc. etc. are not the silver bullet everyone wants to believe they are, and investors should use extreme caution before jumping on the bandwagon.
Excellent point. There definitely is no perfect stock, but there are many very good ones. You hit the nail on the head when you said that no stock has consistently went up month over month for the last 10 years. This is exactly why I’ll probably stick to mutual funds in the near future.
Although it only goes back to 2008, Visa Inc. (V) seems to have a nice positive trend going for it. Not sure what will happen in the future, but I don’t see people giving up their credit cards and going back to straight cash purchases with all the online shopping people do.
True, but that’s assuming that Visa’s expenses and market share will stay consistent (or even improve). Maybe American Express or Mastercard will figure out a way to muscle Visa out of the marketplace. Or maybe some unexpected, Enron-like catastrophe will befall the company, it’s impossible to predict.
Going to the fact that credit cards aren’t going away, I think you’re probably right. Probably. I can’t think of an alternative to credit cards right now, but that doesn’t mean one won’t eventually come out. 25 years ago, digital cameras were a ridiculous concept and nobody would expect Kodak stock to ultimately tank.
In general, I think you’re right about Visa, but putting too many eggs into one basket is simply too risky. If you invest in Visa (or any other specific stock), would it be devastating to you if you lost much of your investment? If not, and you’re very confident in the company, go ahead and take a risk. But if so, put your money in diversified funds that won’t impacted by any one company.
Being too kind!
Smartphones are already being used as wallets and could eventually completely replace credit cards. “Use your smart phone and get a 1% discount”.
Square is another competitor, although they would say partner now – but what if everyone could get a “square card” some day and save money in using it by charging retailers lower processing fees?
Your article raises great points. A successful investor needs to do his own research and arrive at his own conclusions about the future prospects of a company before investing (this is exactly what all great investors have done). He or she should also learn to largely ignore the so-called “expert advice” and the temptation to jump in on the recent “hot pick”. If a company’s fundamentals begin to deteriorate, regardless of the “market thinks”, then perhaps it’s time to sell.
Hindsight makes everything look easy. Picking individual stocks is closer to gambling not investing imo. Very few professional stock pickers (i.e. hedge/active fund managers) can beat the S&P 500 over the long term when you include their fees. The ones that can; your average person probably doesn’t have access to.
What are the chances of an amateur? You may get lucky a few years, but you need to be successful over the span of 30 years or more.
Most people are better off just investing in boring broad based stock and bond index funds and sticking to an asset allocation. I’ve been doing that for 12 years and have done pretty well. It’s easier to just set it and forget it and let the compounding magic work. An active investor needs to be paying attention constantly.
More importantly, with index funds I don’t get stressed out when there are big drops. To me that is just a buying opportunity. Don’t think I’d feel the same for an individual stock.
Though I will use up to 10% of my portfolio for “play” when I feel there is an opportunity. Like end of 2011, when bank stocks got hammered. I bought into a couple banks and up over 150% in a year, which was very lucky..
Once the Fed raises interest rates lots of bubbles are going to pop. I’d get out of any US-denominated investments.