Despite the collapse of almost every aggressive stock over the last three years, some people are still hunting for big game -- the elusive 10-bagger.
But instead of nabbing the rare animal that delivers big money and bragging rights, you're more likely to wind up with a stray that needs a dip and a flea.
If your goal is to invest safely, you don't need to gamble on some new innovation, market or technology -- whether it's satellite radio or a cure for cancer. First, it's extremely hard to identify the one or two companies that will ultimately turn out to be the winners in an emerging industry. And even if you do wind up with one that delivers a 1,000% return, that gain won't make up for all the losers you bet on trying to find that one success.
Figuring out which technologies or medical advancements will ultimately be commercially successful is incredibly difficult. Even experts in fields like biotech don't know. And if you don't have any experience in a particular area, then you're really just guessing. Investing that way is no different than spending thousands of dollars on scratch tickets.
In an emerging industry, dozens if not hundreds of companies will fail for every one that survives and dominates. The collapse of so many Internet and telecom companies is the most recent reminder. For every
it's easy to tick off a dozen busted dot-coms that were dealing furniture, toys, pet supplies and groceries. But this is nothing new: You saw failures like this in the early years of the auto industry. For every Ford, there were several Studebakers.
The point is: Betting on new companies in a new business is a crapshoot.
And spreading your bets across dozens of different companies in just one risky industry doesn't work. Say you buy 100 stocks in one emerging sector. If you make 20 times your money on one stock -- the one that turns about to be the next
-- and the other 99 lose all of their value, then you have a loss of 80% in your portfolio.
Mutual funds are a different can of worms, because they offer a basket of stocks instead of just one. But you still have to worry about betting too much on a volatile and high-growth sector that's loaded with would-be 10-baggers. The chart below shows just how much technology funds have suffered.
Holding the Bag
You hit the jackpot with one but you still lose loads of money. The math
work if you're only investing in, say, five companies and one of them turns out to be a major winner. But take a step back: You'd only be betting on five stocks. The odds of picking one success out of five are slim. You don't have a lot of room to make money unless you're very lucky. And investing isn't about luck.
Plus, stocks tend to be consistently overpriced in areas like tech and biotech because the payoffs can be enormous. These speculative stocks are already expensive when you buy them, which limits the potential upside.
, for example, has posted hundreds of millions of dollars in losses in recent years but at its peak had market cap of about $20 billion. Say the company was a success and got as big as
, which is worth $67 billion today: You would have made a little more three times your money. And that's not nearly enough to cover the dozens of losers you would have owned in that industry.
If you want to bet on a new and risky part of the market, think the way you would if you were heading to Vegas for the weekend: Keep your bets small.
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