The Investment Scientist

The Peril of Chasing Hot Investments

Posted on: January 11, 2019

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On Dec 17th, 2017, that’s one year and some days ago, BTC (bitcoins) punched through

the $20,000 level, peaking at $20,042.91. Only twenty days earlier BTC reached $10,000 and it was during this 20-day period that I got the most intense client pressures to get their money into BTC and other cryptocurrencies. I am glad I kept them away from it, since as of today, BTC is at $3700. That’s a loss of 81.5% in a year.

BTC is not a stock since it’s not even a real business. Here’s how some stocks that were red-hot a mere few months ago have been faring …

Apple, the perennial darling of the investment world, just lost nearly 40% from its peak after today’s close. That’s a whopping $460 billion loss. The loss itself is larger than the market capitalization of all but four publicly traded companies.

Did I notwrite about the danger to Apple from the trade war last year?

Nvidia went up 52% from where it started 2018 before it went down 51.8%. The magnitude of the rise and the magnitude of the fall are about the same. So if an investor got in at the beginning of 2018, he comes out even, right? No! The up move needs to be 103.6% to break even with a 51.8% down move.

AMD went up 232% since the start of 2018 before it went down 45.3%. With AMD if you got in at the start of 2018, you do indeed come out ahead. But nobody had heard of AMD (a small competitor to Intel) until it had risen 200%. Most folks piled on at the top of the market, just to see it drop precipitously.

Now let’s look at a few more familiar names: Facebook is down 40% from its peak;Amazon is down 27% and Google is down 20%.

Just a few months ago, some clients asked me why they should bother with a well-diversified portfolio. “Why don’t we just throw everything in those hot stocks?” they asked. Here is why: hot stocks can turn cold in the blink of an eye.

(And if you remember MCI Worldcom, Fannie Mae, Freddie Mac, Enron, Bear Stearns and Lehman Brothers,

Always stay diversified and stay away from hot stocks (investments).

(Feel free to share if you find it insightful.)

Schedule a free 2nd opinion financial review, buy my wealth management books on Amazon, or download the pdf version here.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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