Sunday, October 15, 2006

A dumb way to buy stocks

I was sitting in the bar the other night and talking to a friend.  He's someone with enough extra money to have an Etrade account setup, and he likes to trade alot.  But he never seems to do so well, and the other night I figured out why:  he buys stocks because of the products the company makes. 
This can be a good thing, say for instance a startup is offering a product no one else has.  Invest, maybe make some money.  It is a REALLY BAD IDEA when you buy a stock based on perceived market position.  For instance, my friend noted that "there are so many of those concrete barriors around in dc, the company that makes them (JJ Hooks) must be a great stock to buy."  DUMB DUMB DUMB.  Never buy a stock because their product is popular.  Apple is a case in point.  You shouldn't buy Apple stock because all your friends have iPods.  Maybe you should have bought apple stock when the iPod was going to come out, but even thats a bad idea.  Not because the stock won't go up because of the product, but because by the time the product announcement gets into mainstream news, everyone else has already speculated the stock will go up.

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