Seeing a particular stock or investment opportunity skyrocket can trigger a desire to get in on the action. Here’s an example of what you’re up against, and why having a fundamental thesis matters.
During my time as an institutional investor, I sat through a slew of hot opportunities, many of which we let pass us by. If we couldn’t understand why a company or opportunity was fundamentally going to grow well, we’d let it go. Fortunately we caught our fair share of excellent opportunities, but there was certainly a list we maintained of our “biggest misses.”
You probably have a list of your own. It’s natural to kick yourself in hindsight for not jumping on a bandwagon once you see how well others have done, like buying Amazon or Apple back in their early days. I always like to keep in mind, though, how important it is to stick to investing in opportunities I understand and have a real thesis for, and I’d like to share an example of why.
The opportunities we are tempted to pursue without proper research tend to be momentum-based stories. You see a company or asset in the news every week growing 5%, 10%, 15% or more. Your uncle just made $100,000 in a month betting on the story. Your beer buddy just took out a loan to invest some money in opportunity X and has already made all his money back and more.
Momentum investing – buying high and selling higher – is a legitimate strategy. But it still requires a thesis for why you think the opportunity will continue