Reading · The Wealth Playbook

This week, with the pleasantly balmy weather, and the calendars synced up, I had a very long overdue catch-up with a friend in our usual watering hole. Invariably with me, the personal finance topic finds its way, like water finds its level. Quicker than a speed boat can veer off a massive wave, we landed on the topic of hot stocks. He was excited about two stocks – one a large pharma that’s risen well over the last 5 years, and another a recently listed NASDAQ stock with a sudden stock jump in the last one month.

At first blush, both compelling. At the next second, déjà vu!

With a massive swig of my Guinness, I promptly added the two hot stocks to my . . . Watchlists!

Over the last few years of marinating in investing ideas and themes and trends, I have heard a few scores of hot stocks. I am sure you heard them too. The stock tip always comes with a strong story – of the deep moat, of the expansive addressable market, of the superior competitive positioning, of the supreme pricing power – all delivered with the zest and zealous of a zealot. I don’t have all the funds needed for all the hot stocks tips, so I created Watchlists in all earnest with an honest promise to myself to research them later. The watchlists are named after a theme or provenance, so they are like a pseudo-fund. The cunning plan is to track the stocks, and when there is strength of conviction over time, to take a position in them. As with all things in life, the important task of research is sacrificed solemnly at the altar of urgent tasks of daily admin.

So, all the wonderful Watchlists languished on my brokerage app – the hot stocks sailed through the draw-downs, survived the corrections, rode the choppy waters of frothy markets, reacted to every data release and all social media pronouncements. Today, I will reveal to you below, the performance of my Watchlist pseudo-funds.

My arm-chair observations

The worst time to invest in a trend is when it is established – after the US elections two years ago, Crypto was riding the updraft and without much of a warning they fell out of favour as quickly as they found favour. Same with Gold.
80/20 rule – In every portfolio, the most gains can be attributed to a handful of stocks. They deliver out-sized returns and carry rest of the portfolio.
The podcast guests are invited because of their recent performance – When a theme does well, those fund managers are all over your eyes and ears, but recent performance is no guarantee for future performance. Emerging Markets and Pacific Markets have captured the trade against US exceptionalism in the last one year. However, for the previous four years, your gentle jogging heart rate would have a better trajectory.
On the rare occasions that I took positions from my Risk Capital allocation, my consolidated returns didn’t beat the market materially. You can read more about Risk Capital here.
You can make money and lose money on the same stock – Carvana grew 96X in four years, but lost one-third of its value in just one quarter, earlier this year. It matters when get in, when you stay put and when you get out.

The next time you are tempted by the next hot stock tip . . .

Scratch the immediate itch by adding to your watchlist
Stay committed to your boringly diversified portfolio of funds
When you have the strength of conviction on a stock, stay within your Risk Capital allocation

Take the tip off, but don’t ship off your hard-earned money!

#75 - The irresistible temptation of hot stock tips

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