- Hot stocks make us all want to act silly
- This is coming back to bite some investors
- Time to do a silly-180
- Loads of new ideas-generating data
It seems 2021 has started to feel a bit fraught for some investors. In the main, the year has been a stonker. But a combination of the new coronavirus variant and increased Fed hawkishness puts us in danger of ending on a sour note – although one should never stop believing in Christmas magic.
For investors with savings snugly tucked away in a global equity exchange traded fund (ETF), the question may be what all the fuss is about. The MSCI World index has only registered a shrug-worthy 4 per cent fall from its November peak and has bounced back strongly. And including dividends, the index is still up a whopping 17.4 per cent in the year to date – an excellent return.
But some investors are feeling real pain. That is particularly true of those who have backed hot parts of the market. Aim is a case in point. This is a market known for its racy companies. Indeed, the index has suffered more than most in the recent market reversal. It is off 8.7 per cent from its early September peak.
It is the hottest parts of Aim that reflect the real torment. For example, the best-performing quarter of the Aim All-Share's 742 stocks measured from the start of 2021 to the index peak have produced an average fall of 21 per cent since the index high. The hottest tenth of stocks are off 33 per cent. The most scorching 5 per cent, meanwhile, are down a gruesome 40 per cent and the 1 per cent that really shot the lights out prior to September have averaged an incredible 55 per cent decline.
Similar stories abound for many of 2021’s hot assets further from home, too. Be that the famous Ark Innovation fund, US lockdown lovelies such as Zoom (US:ZM) and Peloton (US:PTON), Spacs, NFTs and cryptocurrencies.
It is human nature to be drawn to these types of hot-ticket bets. That’s not always bad. Sometimes momentum can be a guide to great opportunities. But fast-rising share prices also make it very easy to get caught up in the excitement of a flimsy story (Lockdown's Broken Promises, 25 Nov 2021). That can make us do silly things. Taking on too much risk through outsized bets or the use of leverage, for example. There is plenty of evidence that lots of people may have been doing this in 2021.
What can we do to resist the allure of being silly when confronted by hot stocks? One antidote to getting carried away involves considering all the wish-fulfilment questions we naturally love to posit for ourselves (subconsciously or otherwise). Things such as: how rich is this investment going to make me? How long before my superior knowledge makes me look like a genius? How clever am I to see what others have missed? What will I do once I’ve multi-bagged?
Now simply flip those questions on their heads. This is not as fun as sticking with the original list but considering the negatives is what helps to stop us being silly.
So we have questions such as: how much poorer could this investment make me if it goes wrong? What am I not considering that may make me look like a fool? What am I not seeing that others have to make them steer clear? What will I do when the value of my investment halves?
And written answers only please. Until we can explain our ideas and reasoning clearly and succinctly on paper (or electronic equivalent) there is no certainty it actually stands up.
Making such checks is not a guarantee against making silly mistakes in regard to hot stocks, but it should reduce their likelihood and damage. And should things go badly, it also makes it much easier to distinguish bad luck from bad decision-making; the necessary first step to becoming a better investor.
For more tips on how to become a better investor, try our seven step guide here.