When Foolish Greed is Expensive

For quite some time I have been writing that speculators were creating a high risk situation for certain segments of the market. I have also consistently warned that chasing the “hot” stock is a sure way of losing money.

Well, the ‘correction’ in many of these previously hot stocks has recently taken place. Here’s some examples of declines from the high this quarter in just the last few weeks:

FireEye              69.5%

Twitter                46.5

Athena Health    46.0

BioMarin            30.0

NetFlix               27.9

SalesForce        22.7

Amazon             22.5

FaceBook          20.8

Tesla                 20.8

 

These losers are all multi-Billion dollar companies. They are not small caps.  These huge % declines occurred during a period when the general market rose slightly and high quality stocks beat the market.

Last post I wrote “Speculators have a tendency to move like a herd, when they exit, usually they all panic and exit at once.” Certainly looks like they all tried to get out of the above “hot” stocks at the same time. Those that bought in the last few months learned that greed is usually a foolish and expensive indulgence.

The good news is that declines in the above listed stocks did not affect WS Wealth Manager’s clients to any significant degree—most WS portfolios performed quite well. The bad news is that much of the money that came out of these stocks is now in the higher quality value stocks and shorter term fixed income securities that long term investors do and should own.

In the aggregate, markets are presently priced based on the assumption that poor economic performance in the last two quarters was due to bad weather.  This is an assumption and not a fact.  If the assumption is wrong and the economy continues to perform below expectations, there will likely be a correction. (Something we have not seen in two years.) But nobody knows for sure because the assumption is based on the future and very uncertain behavior of the global consumer.  We all hope that things are getting better, but hope is not a sound basis for making investment decisions.

So, we still have a lot of uncertainty and therefore still what I perceive as a somewhat dangerous market. Buy, Sell or Hold?  As frustrating as it can be, Hold and caution still seems the prudent course of action for retired or close to retirement investors.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.