Don’t Chase Hot Stocks or Hot Sectors
In our quest to point out the right and wrong investing path to follow, we believe that chasing hot stocks and hot investment sectors is definitely the wrong path. Simply look back at the Internet companies in the 1990s or real estate companies in the 2000s. In addition, energy, biotech, semiconductors, social networking, and many other sectors have gone through big bubbles. And every few years there are a few more investment sectors that become “hot”.
Hot investment sectors seem to keep going up forever. And they’ll make you question yourself and question whether it is too late to get in on all the gains that you missed out on. It’s best to see the investment fad for what it is and move on to other investments. By the time investors realizes that the sector is hot it is usually too late to make money in it. In fact, by the time everyone buys into the sector being hot, it is likely that you will lose money on those investments. Think of Internet and tech stocks after the 2000 bust.
The simple fact is, hot stocks are popular stocks. Popular stocks pull in investors because they want to invest in the company. When a sector or stock gets so hot, other investors and fund managers often feel they need to invest in it just to keep pace with other funds. When these events unfold, the valuation multiples of these stocks rise dramatically. And when entire sectors start trading at ridiculous multiples, it gets easy to justify valuations, because investors compare the earnings multiples of one overvalued stock to another overvalued stock. In fact, analysts will start to use new valuation techniques that make it easier to “justify” the prices. When you see these events taking place, it is time to switch to other stocks and sectors.
It’s true that people get rich buying these companies, but most of those people bought in long before other investors knew about their potential. If you want to get rich investing in hot stocks, the best way to do so is to do your research and find the next hot stock or sector. This is also risky because many sectors or stocks never live up to their potential as business models and fads come and go, and business cycles roil good start ups.
So in effect, your best bet is to stick to a well balanced portfolio of all types of stocks, funds and investments. Rebalance your portfolio often, and if it makes you happy, use a small percent of your portfolio to invest in hot sectors. Just be careful not to get too invested.
Related posts:
