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Tasty Fries!

|Includes: AAPL, Viavi Solutions Inc. (VIAV)
Many of you have been there, sitting at the bar next to a guy giving you 100 reasons why you should buy “the next hot stock.” As you contemplate your list of missed opportunities, you begin to rationalize, “Why not? It’s a $5 stock; I’ll pick up a thousand shares and double my money inside of a year.” Three months later, after an abysmal quarter, you are down 50% with no hope of seeing that $2,500 in the foreseeable future.
These hot stocks are what I call tasty fries: cheap, portfolio-clogging, hot shares of “can't lose.” Like their fast food counterparts, these investments often lead to countless months of trying to get back to where you started before you pulled up to that investment drive-through.
Every day you are bombarded by stories about the future of medicine, and CEOs touting the next big thing in the world of cloud computing. You hear about this stuff and look at the risk-adjusted, asset allocated, blue-chip portfolio that you packed for lunch with all the excitement you had for the wheat toast—no butter—that you ate for breakfast. So you give in, just in time to catch some frivolous lawsuit that sends the stock tumbling.
Stocks are not “hot” until they are broadly popular. By this point they have, often times, already made the biggest percentage of their gains. History bears this out quite nicely. Take your pick of the hot stocks that shot the moon in the 90’s. The trading volume on these stocks jumped almost as quickly as the stocks plummeted--and in tandem no less. JDS Uniphase’s (JDSU) trading volume nearly doubled between 2000 and 2001 while its share price fell by almost 50%. There was a 2-for-1 split during that time, so it could be argued you’d have been at breakeven… until a year later when the shares were trading at 13% of their split-adjusted purchase price.

Source: Yahoo Finance

What then should be done about an insatiable desire to buy these tasty fries? I believe that separate investment accounts should be set up with a small percentage of ones investable assets. Once this account is established not a dime should be added to it moving forward. Everybody feels compelled to speculate from time to time. And, while history shows that stock-picking can have devastating results, I believe that you have to allow yourself the opportunity to pick up a couple hundred shares of a company like Apple (AAPL). A $1,000 investment in 2001 (Roughly 125 shares) could have returned approximately $63,000 or 58.75% annually over the last 9 years after a 2-for-1 split. And if it tanked, you would not be selling the house to make up the difference.

Source: Yahoo Finance

There is no question that stock picking brokers will pick some winners, and these winners can help bolster investment performance for a quarter or twoWhat's worse is that It can be downright frustrating to sit back and watch while the risk-takers make the quick buck on a hot stock. But it is important to remember that few people have the integrity to publicly own their losses. Success is the result of having a written Game Plan that sets you up for long-term success while also incorporating your appetite for a few tasty fries every now and then! 

Disclosure: No Positions