There are exceptions to every rule. That being said, it is generally risky to invest in what everyone else is investing in. Why is that? The smart money invests in companies that are relatively unknown. Smart money invests in companies when their valuations are high and their cost is low. As soon as these companies come to the attention of the general public, it is already too late.
The smart money gets in early. They wait until the public starts to pile in. When that happens, the stock shoots up and the smart money bails out. It’s as simple as that. The smart money buys low and sells high. The general public, because they don’t invest in a stock until everyone knows about it, tends to buy high and sell low. This is how the market balances out.
Where’s the worst place to get information on hot stocks? The major media’s economic talking heads. By the time they are recommending a stock, it is probably already too late to get in. For example, Jim Cramer was advising his viewers to buy Bear Stearns just a couple of days before it crashed. Just because you’re on TV doesn’t mean you know what you’re talking about.
Just because you’re on TV doesn’t mean you’re an idiot, but the odds are in favor of it. If one were to go back over the past few years and look at what the mass media pundits were predicting, you would find that most of them were dead wrong nearly all of the time. They should be considered as entertainment, not serious investment advisors.
Those who actually predicted the housing bust and much of what followed are in the minority and are seldom featured in the media. People like Euro Pacific Capital’s Peter Schiff have been pretty much on the money in predicting the crash we are experiencing right now. These are the kind of people you want to listen to and not your hairdresser or cabbie. Even Ben Stein, who liked to yell at Schiff on Fox News, finally apologized and admitted that Schiff was right and Stein was way wrong.
My advice for anyone trying to choose stocks that might have a chance of making money or which will at least not bankrupt you, is to look into the many small investing newsletters that are around. These can cost over $1,000 a year but there are many that are free. Even those who charge for their newsletters and other services, still write free articles and share their insights.
How to choose among the many investment newsletter writers? Look at their track record. Anyone who is going to be helpful to you in choosing a hot stock with low risk will be someone who has made a lot of money in the stock market.
Many of these successful investors identify themselves as contrarians. This is because they invest in a stock when no one will touch it and sell it when everyone else thinks it’s going to go up forever. It is precisely when everyone else is jumping into a stock or investment vehicle that the contrarians are getting out.
If someone on TV is going to tell me what I should invest in, I want to know how well he or she has done over time. Is she buying the stock she is recommending? How successful have they been in the past? Most newsletter writers, when they mention a stock, will tell you if they own it or are planning on owning it. During the dot-com bubble, on-air personalities were recommending stocks in companies that they actually worked for. The same could be happening today.
Be very cautious when everyone is telling you to invest in a particular stock or a particular market sector. A stock may be going up, but how long has it been going up? I have certainly experienced getting into a stock at the top and losing my shirt. Use due diligence and investigate any stock regardless of who is touting it.