Should You Hitch Your Wagon to a Racehorse?

Whether you’re a seasoned stock investor or a newbie, chances are that you’ve come across that one stock that seems to be on fire.  It will surge a percent or more for a few or even several days, cool off for one or two, then continue its strong trajectory for weeks and even months.

The question arises:  should you jump into owning a stock that’s growing fast?

Before I continue, a bit of a disclaimer (in addition to the main one on this site):  I’m about to give accounts of some extremely successful investment decisions that I’ve made – thus far – to illustrate my main point.  First, I’m not trying to boast or brag, but rather to encourage and inspire you.  Second, I had just as much chance of losing as I had of gaining the moment I bought the stocks mentioned, but I hope that the reasoning below will help you achieve the latter a lot more often.

Anyhow, here are some important things to consider before if you’re thinking about buying a fast-growing stock:

1. Could the explosive growth come crashing down?

More specifically, what’s the health of the company in question?  In other words, is the stock price surging due to short-term speculation or is the company benefiting from being a major player with a proven track record in a strong, long-term trend?

For example, are you following some penny stock that’s surging ahead on speculation?  If this is the case, then it will not likely follow a growth trajectory for several weeks or months.  More than likely, it will last a few weeks at most and fall as fast, if not faster, than it spiked upward if the speculation proves false.  If it proves to be true, then perhaps some sustained momentum will occur.  However, as I’ve warned in other posts, this blog promotes the practice of long-term investing, not short-term gambling – ‘growing wealth slow,’ not trying to ‘get rich quick.’  Messing around in the world of penny stocks almost always results in leaving with less than you entered with, in most cases nothing or close to it (before a person will hopefully come to their senses).  And most people who do have the smarts to cash out on the extremely rare penny-stock winner often put it into another penny stock/stocks and lose it all over again.  (Gamblers tend to have this sort of a result when it comes to money, just saying!)

Rather, I advocate looking for a company with something solid to go on, a proven track record.  When this is combined with the company being a major player in a currently strong industry or trend estimated to last long into the future, that’s when it’s stock can catch fire.

To use one example, when PayPal (PYPL) spun off from eBay in July 2015 (which isn’t the first time that it had been a separate entity), I was salivating.  Here was a company that had MORE than a fantastic track record and a leader in digital payments and here it was, getting spun off from an entity that was frankly holding it back.  Unfortunately at the time, I had some family issues going on (a dad in his final days of cancer) plus not enough funds to buy some shares, so I kept a hawkeye on the share price.  Fortunately for me, it did little until April 2017 and I suppose that I didn’t jump in when I could have a bit before then because I hadn’t seen it take off yet.  Was this spin-off going to actually work and gain traction?

In April 2017, PayPal finally began to take off.  Prior to that, it had crept up to $43 per share, a few dollars above where it started, but news that people had been waiting for finally made it ‘the’ stock to own.  Three months later, and two years after spinning-off from eBay, in July I finally jumped on board at around $58 per share.

If I had bought back in April of that year, I would have earned about a 37% return between then and July.  But you know why I didn’t care then?  Because I saw the potential of this company finally being realized; I saw it gaining traction and felt that it was going to surge for a good length of time yet.  And you know why I don’t care now?  Because as of this writing, my return is nearly 60% in little over one year.  Yes, the surge has cooled off (for this time), but by jumping in instead of waiting longer, I was rewarded by riding the rest of the wave, which did not come crashing down, but instead is just not as steep upward as during the stronger surge in price.  But it’s the type of company where a future strong surge is a definite possibility.

So again, I had no problem hitching my investment wagon to a racehorse like this because I was convinced by all my resources (including The Motley Fool’s “Stock Advisor” recommendation that finally convinced me) that it had all the signs of being a much bigger winner even after the current surge was over.

2.  Have you actually missed out?

There are many investors who would not have bought PayPal at the price I did, knowing that they would have already missed out on a very handsome return, way more than the 37% I mentioned above.  In fact, many of them wait for a major price correction that may never happen or they don’t invest at all, thinking they’ve ‘missed the boat.’  I hope that what I described has convinced you to think otherwise.

If that story wasn’t convincing enough, here’s another.  I bought Amazon (AMZN) at just under $400 per share when many on Wall Street and the perpetual Amazon nay-sayers wondered if it had already run its course.  I reckoned that if I’m absolutely in love with the site, then how many other millions of people are also and what’s the actual percentage of people who don’t buy online now that could in the future?  This was back in December 2013 and then as now, little more than 10 percent of North Americans regularly buy online.  So I decided to ignore the rather lofty stock price at the time and instead look at the future potential, which then and now still seems enormous.  I won’t bother to comment on whether my share purchase was a good decision.  Suffice it to say that the price is now over $2,000 per share, so I’m not totally regretting that I had missed out on a several hundred percent return in the many years prior to then.

3. Don’t put in more than you’re willing to risk

There are many stories of many a fortune that could have been made if only an investor who bought a high-flyer would have cashed out before it crashed back to earth.  Bre-X.  Enron.  Many of us have heard the stories.

However, those who lost the most were stupid – er – ‘unfortunate’ enough to have put most of their money into that one stock.  So that’s the first lesson:  don’t get caught up in a high-flyer to the point where you’re putting too much into it, or at least more into it than any other stock you own.  For example, if you have a rule that no one stock holding will comprise more than 10% of the initial amount that you’ve invested into all your other stock holdings, then don’t break that rule if being seduced by a high-flyer!

Also, Bre-X is an example of something that didn’t have a leg to stand on.  The reports of false mineral deposits forever changed the way that mineral companies report their ore assay results.  I avoid resource stocks like the plague (they were my first lesson as a stock investor on how to lose money FAST) and I would only consider a company that has an actual mine or operation running, not some assay report that claims this-or-that percentage of gold/silver/copper etc. in the deposit yet no actual mine to pull it out of the ground.  To me, that’s like buying shares in a car company that hasn’t built or even designed its first car yet!  PayPal and Amazon, on the other hand, already had very solid businesses plus substantial potential ahead of them when I jumped in.

So that’s the second lesson:  I would encourage you to not just jump into owning stock in a high-flying company unless the press reports and financials (ex. sales and earnings growth) are substantial enough reasons to be fueling – and supporting – the stock’s price.

The Final Word

My inspiration for this post came from the purchase of a current high-flying stock only two days before this writing.  It will go unnamed here because I don’t want to come across as some sort of guru or stock pick service – I’ll leave that to the experts at services like The Motley Fool (but I will let you know this stock if you contact me!).  Anyhow, I had been watching it for a few months, but it was only a few weeks ago that I finally dug more into what the company is about and its products and services.  I checked out its site in detail plus consulted other sources, as usual.

I’ll have to admit that some of my hesitation about jumping in a month or two earlier is the thinking above that is so easy to fall into:  ‘The price has already had a large run-up; I’ve already missed out on a substantial return in the past year, even the past three months.’  However, news about company developments and financials were extremely positive and I could stand it no longer.  I jumped in and after two business days as of this writing, it’s already up almost 10%.

That said, it could fall even more than that a week or even a day from now, but the trend of this stock has been strongly upward.  I only jump into owning a high-flying stock if I perceive that all signs (as described above) would make one feel like an idiot for ignoring them.  If a major plunge does happen, then I will probably write about it at some point.  As much as I like to encourage other investors (or potential investors) with my success stories, I’m also humble enough to admit when I’ve messed up and what I’ve learned in order to help other investors.  Hopefully in this case, the latter won’t happen, short term or long term.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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