Can buying a hot stock make an investor money?

Question:

I know that the Monday Morning Millionaire Program recommends acquiring the whole U.S. market by buying an index exchange-traded fund (ETF) which tracks the S&P 500 and not picking stocks. Surely, there must be exceptions to this when some sector is unusually hot such as the cannabis stocks recently.

I was reading up on the whole cannabis situation, so I bought some Canopy Growth Corp. (Symbol CGC) at $32. It fluctuated wildly over the next few months soaring to over $50 and then down to $28. I hung on.

Finally, on October 15th it reached $71.60, and I sold it. It went up to over $75 that same day and then dropped to $68 a day or two later.

Is it not possible to repeat that sort of result when some sector is hot?

Monday Morning Millionaire Program Answer:

You are an active investor. The dark green line in the chart below shows what CGC did last year.

Savers buying an index exchange-traded fund (ETF) which tracks the S&P 500 are passive investors. The red line shows SPY, an index ETF  tracking the S&P 500 during the same period. By comparison to CGC it looks pretty tame, does it not? You doubled your money in one month buying CGC while SPY slept.

In April 2000, Barber and Odean published a paper tracking over 66,000 accounts (that is not a misprint) over a five-year period. Active investors earned an annual return of 11.4 percent. Passive investors gained over 17 percent during the same period. Many other studies show similar outcomes.

Have fun investing actively but to do so in a “fun” portfolio. Be a passive investor in your core portfolio.

My personal “fun” portfolio makes up about 5% of my total market assets. Regardless of how it fluctuates, it will never have a major impact on my holdings. No one needs a “fun” portfolio.

On November 20, yesterday, we published The Speculation Blues, a charming poem by Mark T. Hebner with a link to a related video. It talks about active and passive investing.

You will enjoy it.

 

 

 

 

Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me