Why investing in the hope of a unique outcome can be a huge mistake
When choosing stocks to invest in, it can be easy to navigate to a particular story. But if this positive narrative is based on a singular binary result (a certain event does or does not happen), it can lead to disastrous mistakes. In this Motley Fool Live segment of “The 5” recorded on October 1st, Fool.com contributors Jason Hall and Jon Quast discuss the issue of trading a stock based on a binary outcome.
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The portfolio advisor returns 6/15/21
Jason Hall: Infrastructure week, guys, I think we’re 27 in infrastructure week. Going aside, we have bipartisan support for this. Everyone knows that in the United States we have to spend tens of billions of dollars to improve our infrastructure, but Congress just can’t seem to get by. But we’re not going to talk about politics, we’re not going to talk about our own partisan positions here. This is not what we do. That’s not what the good fools back home are here to see.
Let’s talk about investment mistakes. Actually, which I’m going to do because I think it was just mind blowing because it’s like one of those things where people look for the craft. How can you profit from the thing? Here are some of the most popular infrastructure stocks on Google and click a bunch of articles just to see what the financial media have written, and these are some of the most popular. That’s what stocks have done over the past month. Trade in infrastructure, guys, hasn’t worked. Much of this has to do with people looking for a specific result. Sometimes we are looking for a binary result, sometimes we are looking for a specific thing. We have all had an experience where we lost money, we made a bad investment, largely related to one thing. Talk about these mistakes. Jon, do you want to start us?
Jon Quest: Yes I do and the company I’m going to talk about here is Go Pro (NASDAQ: GPRO). I am a surfer. When GoPro first came out, I really fell in love with the product. You can take it in the water, take photos of your surf session or video, whatever you want to do, high quality stuff. GoPro, I was a new investor at the time. I’ll show you guys what I was watching here. This is GoPro’s chart from its IPO to where I bought it. I actually started buying here. After that, it fell below $ 50 per share. Why was I interested in GoPro? Well, that was down. You want something inexpensive. You want good cheap stock.
Room: Buy on the dip, baby. Buy on the dip.
Quarter: Exactly. I was really smart. Then I started to aggressively accumulate here. The reason I was accumulating aggressively is because they were getting ready to launch a drone product, so a brand new product, and they’re going to be upgrading their cameras as well. The HERO4 was the newest at the time, and they had been dating the HERO5 for a while. For me it was going to be right in time for Christmas and they were going to sell a cargo of boats. That’s really all I got about the business. I can’t say that I understood the fundamentals of the business better. I can really appreciate it.
Room: That in itself says a lot, doesn’t it?
Quarter: Exactly. For this reason, I can really appreciate very much the same stock traders who are a press release going out and it’s buy, buy, buy, buy, buy, get caught up in the hype. I was that guy. At one point, more than half of my wallet was GoPro. Mistake number two, over-allocation. This is what GoPro has done since then. They ended up not getting their products out on time. They had a problem. They couldn’t get it to stores in time for the Christmas holidays. They ended up not selling what they thought. They had to cut prices, profit margins took a hit, and that’s what GoPro stock has done since.
It was a terrible thing, two lessons there. Above all, do not over-allocate to a single stock. That’s why we say diversify. If something is already five percent of your wallet, maybe buy it no more, as that sets your wallet back from the years when you were wrong. This is the case with GoPro at the start of my career as an investor. Then if your whole buying thesis is based on one event, which in my case selling a cargo of drones on Christmas, if your whole thesis is based on one thing and that thing doesn’t happen, that’s a problem. . Always make sure you have multiple results.
Jason hall has no position in any of the stocks mentioned. Jon quest has no position in any of the stocks mentioned. Nicolas rossolillo and its clients have no position in the mentioned stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.