The Perfect Stock

Doesn’t exist.

Just ask anyone who bought Apple, at some point during its never-ending rocket to an inevitable $1M per share.

If you bought Apple, as just about everyone in my peer group suggested I do around its peak of $705 (Sept., 2012), you would be down 40%. If you had merely put your money in the S&P 500 index, you’d be up about 10% – or 50% better off over the last eight months.

May sound like cherry (or apple) picking – and it is – but the point is that 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:

  • perfect stockAnalysts 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.

So when that next familiar, hot, or perfect stock comes along, you’d probably be best off to stay away.

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