Extra… Extra! Read all about it… Analyst upgrades stock rating causing a surge in stock prices… Your circle of friends give it a go ahead… Everyone is jumping onboard the bandwagon. With everyone headed this direction, you just can’t go wrong!
…. Or can you?
Vying for the hot stocks on Wall Street or the Singapore Exchange (or whatever exchange your country has) may not exactly be a good idea… and almost never ends well for the following reasons:
Typical “hot stocks to buy” have so many people jumping onboard that it may very well be overvalued. The market overheats the prices due to over optimism.. What follows next may very well be a reversion of stock prices, causing investors to be burnt. Jumping onboard the hype train never ends well! Try hunting for undervalued stocks instead.. stocks that are underpriced based on their excellent business model, management and track records.
2. Lack of Business Ownership
Most people who jump on board the bandwagon are lured by the trends and promise of quick gains. The best way to profit from a stock’s growth is to understand that you are owning a piece of business you are willing to stay vested with as it grows. With a short-term drop in stock prices, most people who buy “hot stocks” tend to get spooked and cash out paper losses to real losses!
3. Lack of Fundamentals
Some “hot stocks” may very well be great companies that people don’t tend to stay vested with. Some.. not so good. Must we remind the never-ending cycle of media hype – investors jumping in – before reality sets in? We’ve seen it happen over and over again.. We had Tulip Mania in the 1900s, followed by the dot-com bubble.. then the Cryptocurrency crash early this year. Understanding the good fundamentals of any investment is critical, followed by understanding the value of this investment based on fundamentals. If you were to pay too much for a good thing, you would lose money. Needless to say, if you are paying too much for something that is technically worthless, that’s even worse!
So how should you approach searching for hot stocks to buy?
1. Keep Calm and Assess!
The latest IPO or hot stock does not necessarily mean it’s a fundamentally good business to place your money in! Assess the company from the ground up using Value Investing College’s PIEC RISK analysis which covers all grounds from business model, business defence and track records.
2. Valuate and Valuate
Never overpay for any investment. Hot stocks tend to be overvalued. Figure out the right price you are willing to pay before jumping in.
3. Understand Short Term Price Movements
Short-term price movements are inconsequential to the real investor. Don’t get spooked by these fluctuations which are largely driven by market sentiment, sometimes it takes time to hold a good investment before profits are realised!
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