Getting in on the ground floor with new fast growing stocks may seem enticing, but there are many reasons why most new stocks promoted as “can’t-miss” ideas, do miss.
Some aggressive investors like to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.
These investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor. Many promising junior stocks fail to thrive as businesses for one or more of any number of reasons. To borrow from the opening lines of Tolstoy’s Anna Karenina, successful stocks tend to have a lot in common, whereas unsuccessful stocks tend to suffer from their own unique sets of risks and faults.
Find the ‘Real’ Blue Chips
Blue chip stocks give investors an extra measure of safety in today’s volatile markets. But not all stocks with a blue chip “reputation” deserve that label.
Real blue chip stocks are well-established, dividend-paying companies with strong positions in their industries—and management that makes the right moves in a changing marketplace. Pat McKeough shows you how to identify these long-term winners in “Finding the Real Blue Chips Stocks: The Power and Security of Canada’s Best Dividend Stocks.”
Sometimes stocks with intriguing business concepts just never get anywhere. They generate a number of encouraging news releases, but these releases turn out to be a series of exaggerations and broken promises.
Stock investing advice: When one important investor sells, trouble often follows
Promising stocks may start out with a brilliant idea or a plan to get involved in a high-profile or fast-growing business area. They may enjoy an initial burst of sales or even earnings. But many just can’t keep up the momentum. They never reach the critical mass they need to achieve consistent profitability.
This is more common for fast growing stocks in the technology industry, because they compete with well-established, well-financed senior techs. The seniors have an enormous advantage in well-trained staff, sales networks, media contacts and all sorts of other business assets that can take years, if not decades, to develop.
You compound your risk if you invest in a promising junior that is a “thin” or illiquid trader. When a stock is a thin trader, it doesn’t take much buying or selling to influence its price. So if just one important investor decides to sell, it can cause an abrupt stock-price slump. This can spark a cascade of selling and a collapse in the stock’s price. The resulting stock downturn can scare off other potential investors. This can make it impossible for the formerly promising junior to raise additional funds when it needs them.
Investors in start-up companies also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of fast growing stocks ever go on to significant success.
No matter what kind of stocks you invest in, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-part Successful Investor strategy:
Do you have an example of a “ground floor” stock you bought in its early stages that turned into a big success? Have you turned down a new stock that was being promoted as a “can’t-miss” idea, and you’re glad you did? Please share your experience with us.
Note: This article was originally published in 2012 and has been updated.