Can You Afford to Bet on the Next "Big" Stock?
Jun 19th 2013 10:42AM
Updated Jun 19th 2013 11:25AM
The odds of you picking the next big stock, like a Google or an Apple, are insanely low. Yet popular stories about the next "big" investment tempt us to believe that this time we're on to something far enough ahead of time to ride the investment up.
Why do stories about Google and Apple make it so hard to behave? Because they've delivered results that make the most cautious of investors secretly wish they'd jumped on board.
"From August of 2004 to December of 2010, Google's price increased from $100 to $600 per share. And Apple, from the end of 2000 to the end of 2010 returned 43.35X. Those are returns that put dollar signs in any investor's eyes."
Who doesn't want an investment that performs like that? The problem, and it's a big one, is that we tend to look to the past when we're seeking answers about the future.
Nathan Pinger at YCharts describes this situation perfectly: "Trying to pick a stock's future growth path based on past growth is like trying to guess if a coin will come up heads or tails when you know that the last toss was a heads. The previous toss tells you nothing."
I used to get calls from clients convinced they'd found the next big stock. The clients were positive that it made perfect sense to dump their plans, ignore their goals, and bet the future on, well, a tip from their brother-in-laws.
We grow up for a time believing that superheroes and magic are real. We root for underdogs even though we know beating the favorite will take a miracle. So does it really seem all that crazy to believe that the stars will align and that one financial decision will change our lives forever?
The problem is that when you chase after a particular stock, you lose sight of the things you actually can control. You lose sight of your goals and plans, for instance.
For 99.99% of us, chasing after the Googles and the Apples of the world will lead to the investing version of dating rejection. Meanwhile, the odds of you achieving financial success by behaving correctly are insanely high. So do you really want to toss a coin and make such a big bet on the next big thing?
A version of this post appeared previously at The New York Times.
Carl Richards is a financial planner and the director of investor education for the BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. Visit Behavior Gap for more of Carl's sketches and writings.
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