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Investors, Beware Fad Stocks

One of the ultimate fads, in my view, is Facebook (FB - Get Report). Millions of teenagers would no doubt disagree with that assessment. But I am personally growing a bit weary of the product itself, and I suspect that there are many others like me. I'm tired of seeing what little Jimmy accomplished today, or what Linda Lou has posted as the picture of the day.

I'm not taking away from the innovation, or the brilliance of the idea. I just don't see the staying power. Something else, some other social networking phenomenon will emerge, and Facebook will be yesterday's news.

Fads are fun. They can make life a little more interesting, and perhaps a bit easier for a time. But they wear off, and as an investor, I don't want to be left holding the bag. Innovative ideas or companies don't necessarily translate into great stocks, especially when valuations are out of whack, and expectations are sky-high.

If I'm wrong, and any of the above stocks have staying power and their valuations become cheap, there's always a possibility they might hit my radar in the future.

After all, I never thought I'd own eBay (EBAY - Get Report), but once the company passed through its high-multiple/high-expectation phase and then continued to deliver 20%-plus net margins while maintaining an excellent balance sheet, I took a position. Of course, it was trading at 8 times forward earnings and was long past fad status.

At the time of publication, Heller had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.
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