Yahoo’s on its way back up! Solar is the wave of the future! Water is the world’s most precious resource!
Ever hear these taglines or something similar? If you ever expose yourself to the financial media, you are bound to here something along these lines. Is it right for you? Here are some things to consider before you get all fired up and ready to pull the trigger on a hot stock.
1. Trendy stocks come at a price.
First, let’s take suitability into account. Following the next hot stock because everyone else is can be dangerous and downright reckless at times. Let’s take the high-flying tech stock of the 1990s. Everyone and their mother got on this boat: professionals, mutual funds, and individual investors. Even basic fundamental analysis showed that these stocks were being valued well beyond anything they could ever hope to achieve (Eg. Trading at 100 times earnings, if you ever see a company with an unusually high P/E ratio, find out why!). People bought anyway of course, because it was the next big thing, the new economy. We’re seeing a similar trend today with green tech and ethanol companies, many of whom trade at a lofty price despite not being profitable and have a shaky future.
2. Following professionals is ok (sometimes).
So you never want to follow anyone ever, right? Not so fast, friend. There are in fact situations where it may be intelligent, even prudent, to follow the leader. Master investors like Warren Buffett have proven that they know exactly what they’re doing. You should at least take a look at what the big guys are buying. Don’t base your entire portfolio strategy on this, but its a great starting points for investing ideas.
3. Do your own homework
Always know what you’re going to buy and why. This may sound boring, but you’ll be thanking yourself when you pick a great stock on your own. Take a look at the company’s financial statements, listen to conference calls, get a hypothesis on why you’re looking at the firm. The more you know about a company you’re going to invest in, the less likely you are to fail.
Happy Stock Hunting.