November 16, 2018

Don’t touch hot stocks! Or should you?



Author Thomas Meyer ("Wolkenbruchs wunderbare Reise in die Arme einer Schickse", now also in cinemas) started investing in stocks because of my blog. "The whole thing used to be strange and slightly scary to me," he says, "but you made me understand and even like it." I am very pleased with this feedback.

Thomas didn’t just ask me what exactly he should do – but also what he should stay away from. My fatherly advice was exactly what fatherly advice usually sounds like: "Don’t touch anything that’s hot." Hot stocks like Tesla, hot technologies like social networks, hot industries like cannabis – are best left alone.

Ok, "don’t touch them" might not be the best way to describe it. It would be better to say: "Touch them, but don’t grab too much." It’s alright to buy Amazon, Google, and Tesla. But only if these stocks don’t carry too much weight in the portfolio. And if disappointments, therefore, don’t hurt too much.

"So what isn’t hot?", asked Thomas. I answered: Everything that is out, which is the vast majority of the stock market. Machine manufacturers, automotive suppliers, retail chains, utility companies, natural resources giants, pharmaceutical giants. You can always invest in everything that is big and a bit boring.

Because that’s how you keep a cool head. It’s easy to get excited about stocks that are currently "hot". You want to be part of the boom and you wind up investing more than you wanted to or should. Three days later, this part of your portfolio can already be down by 50 percent.

"My cannabis stocks have lost half of their value!" is what Thomas wrote to me the other day. He had chosen to ignore my advice and had invested in a "hot" industry. Luckily only a few hundred francs. Or maybe not, because the shares actually recovered a short time later and are now even worth slightly more than when he bought them. Still, the scare was an important and only temporarily expensive lesson for Thomas.

And who knows, maybe he is right and cannabis will experience a big boom in the next few years. We are all equally good at predicting the future. Some are simply right, while others are wrong. Maybe what is hot today will stay hot for a long time. Or maybe the stocks that are cold right now will soon bask in the sunlight.

If you think that the political and economic developments in Russia are favorable, then you should take a look at the stocks there, because they are currently very cheap.

The same is true of China, which we in the West still view very critically. Stocks of Chinese state-owned companies might not be the best moral choice, but they could be an attractive investment opportunity. At least if you believe that China will develop into a free society.

Buying stocks is always an attempt to predict a favorable future for oneself. Many people have managed to get rich this way, others have gone bankrupt. And history shows that boring people tend to do better at the stock market.



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