Everybody Is Buying These Stocks

If you know your principles of influence, then you know that once I tell you the stocks that everybody has been buying this year, you're going to feel the need to go out and buy them for yourself. This phenomenon is called "social proof," and it's effective because when faced with limited information, people tend to choose what other people are choosing.

In some circumstances, this is quite helpful. Let's say, for example, you're at a new restaurant and are trying to figure out what to eat. If everyone around you is ordering the chicken and gravy, then it's likely a safe bet that the chicken and gravy tastes pretty good.

But it's not always gravy
When it comes to investing, however, social proof is your enemy. Looking back on the tech bubble, James Grant wrote in The New York Times, "The unbearable sight of a neighbor getting rich in the stock market in the late 1990s made millions of Americans bipolar." It was social proof, in other words, that led investors to speculate on technology stocks such as Amazon.com (Nasdaq: AMZN  ) and Intel (Nasdaq: INTC  ) at the end of 1999. And while Amazon just recovered its 1999 high (it was dead money for 10 years), Cisco is still down more than 60%.

Similarly, social proof was one of the forces behind the housing bubble. Folks who watched television shows such as "Flip This House" or "Flipping Out" saw how much money was being made in real estate and wanted to try it themselves. Perhaps more amazingly, banks -- subject to the same social pressures -- let them!

For evidence of that, check out Michael Lewis's account of the debacle that took place at AIG Financial Products. AIGFP justified its reckless purchases of credit default swaps by seeking out the opinions of banks like JPMorgan (NYSE: JPM  ) and Morgan Stanley (NYSE: MS  ) . But few uncovered the truth about the housing bubble before it burst. Rather, faced with limited information, they all copied their peers.

When it comes to money, that's a problem
When it comes to investing, if everybody is buying the same asset, the price of that asset will increase. As the price of an asset increases, its expected rate of return decreases. Take this to its logical end and when investors are all investing in the same asset, they're all just going to end up with a pretty lousy investment.

So it went with tech stocks in 1999 and condominiums in Florida in 2008, and so it will go with today's most popular stocks.

Are you prepared?
The only way to protect yourself from this inescapable truth is to know what today's most popular stocks are. That's why this next paragraph is the most important of them all:

According to data from Morningstar, emerging markets stocks are by far the most popular stocks this year. In fact, they've seen inflows of more than $18 billion.

Those inflows, in turn, have helped emerging markets stocks rapidly increase in value. Even the plain Jane Vanguard Emerging Markets Index (NYSE: VWO  ) , a megacap focused collection of international names such as American Movil (NYSE: AMX  ) and China Mobile (NYSE: CHL  ) , is up more than 60% this year.

Which brings us to the present
As a result of all of that love that's been showered on emerging markets this year, stocks in this market segment are generally now expensive. So if you take your cue today from what others are doing and blindly buy emerging markets today, you may be dooming yourself to bad returns.

The flip side to that, given the prospects for a weakened dollar and the way that India, China, and Brazil weathered the recent global economic downturn, is that if you don't buy emerging markets stocks today, you're likely to miss out on decades of economic growth.

The good news is that there's an out. Remember that people only fall back on social proof when they are given limited information. Our aim at Motley Fool Global Gains is to help investors buy emerging markets with far more thorough information. That includes insights like these:

  1. Rural China stocks are significantly cheaper than China stocks based in Beijing or Shanghai.
  2. Multinational companies that were seeing currency fluctuations drag on results are about to see currency fluctuations improve their results.
  3. Because of the price and the gray market, the iPhone isn't going to be as big of a deal in China as the media thinks it's going to be.

In other words, we want you to buy emerging markets stocks today, but we don't want you to buy the same emerging markets stocks everyone is else buying. To see what we do want you to buy, click here to join Global Gains as our free guest for 30 days (a $25 value).

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of America Movil. America Movil is a Global Gains recommendation. Amazon.com is a Stock Advisor pick. Intel is an Inside Value selection. Everybody like the Fool's disclosure policy, so you should, too.


Read/Post Comments (13) | Recommend This Article (76)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2009, at 2:39 PM, hardrockfool wrote:

    It is good to be careful not to just "jump on the bandwagon" when picking stocks to invest in. I recently made 30+% on AMZN though and some naysayers were saying "short it" at the time too. So, where it goes next we'll see but I'm thankful I made that trade.

  • Report this Comment On November 12, 2009, at 8:08 PM, n4wdx wrote:

    This read is just another example of an advertisement for an investment service disguised as a helpful article, that, in reality, contains little useful information.

  • Report this Comment On November 13, 2009, at 3:05 PM, SkeeDaddy2 wrote:

    I agree with n4wdx. I rarely pay attention to these commercials and their sensationalized headlines that are designed to solicit subscriptions to MF.

  • Report this Comment On November 13, 2009, at 4:33 PM, Hosuton wrote:

    Please stop bobarding us with usless read that is nothing but more advertisement. I am getting a bit irritated, especially with you automatically renewing my subscription to that junk mail and scam.

    Stop the annoying practice.

  • Report this Comment On November 14, 2009, at 11:05 AM, gimponthego wrote:

    Would someone critique my portfolio, please? I signed up for this service for two years. We trade within our IRA. Not right, but it's my situation. I have remained solvent for the past five years. I start each year with $50,000. The first of the year, I take out $18,000 to augment the $18,252 from SSD. I am 64, my wife 63.

    So far, I have been able to work my way back to $50,000 by New Years Eve for 5 years running. This year, I've managed that on the backs of these stocks: TAYD / RAX / TMRK / SLW and NFLX. If someone could offer some serious advice I'd be grateful!

    My wife and I gave this serious thought when I had to retire. We love staying home, taking some trips, but primarily being together with our cats, trading and working in the garden. It really is a great life...so far.

    BTW, we have zero debt...no mortgage, no credit cards, vehicles, etc. nada

    Thanks,

    Johnny

  • Report this Comment On November 16, 2009, at 1:19 PM, Zylle wrote:

    ;/

    How many Fool things do I have to buy to get a piece of information?

  • Report this Comment On November 20, 2009, at 1:30 PM, chrisbenson wrote:

    gimponthego, I am no professional financial advisor, but my opinion as a fellow investor is that you have a couple of winners there in RAX and NFLX, but I would consider taking profits on NFLX because it's going to get easier and easier to find free streaming content, so I wouldn't plan to buy and hold real long-term. The other guys are really risky - I can't imagine myself retired at 64 and banking on a company like TAYD with $15M micro-cap and no dividend. Overall, you are way to levered to the tech sector and I would recommend diversifying into best-of-breed blue-chips with strong dividend yields (PG, JNJ, T, MCD, etc.)

    I also agree with the folks who are getting fed up with every piece of information being a glorified ad for a paid service.

  • Report this Comment On November 20, 2009, at 2:02 PM, stgodby wrote:

    "The first of the year, I take out $18,000. So far, I have been able to work my way back to $50,000 by New Years Eve for 5 years running."

    If you take out $18K from $50K that leaves $32K. And then if you make up the $18K in a year that is a 56% increase. There is no way in hell that you have made 56% on your money for the past five years! If so, I'll give you all of my money to invest and pay you a nice premium. Please tell me I am missing something.

  • Report this Comment On November 20, 2009, at 2:42 PM, sluggger222 wrote:

    stgodby, I am sure that he has money deposited into that account on a monthly basis by the company that he retired from. He did not tell us how much that is.

  • Report this Comment On November 20, 2009, at 4:25 PM, georgeebee wrote:

    if he would of taken his 50.000 plus the 5x18.000 he would be sitting on 140.000 even if he made not one red cent he could of put it under the mattress and then put his 50.000 back into the magical account that lets you take 18.000 out of 50.000 and still have 50.000 to take out next year sign me up I will pay you ten thou.every year if all I have to do is deposit 50.000 Georgebee

  • Report this Comment On November 20, 2009, at 6:15 PM, 7t52day wrote:

    Need a little reassuring. Has anybody done any extensive research in "Genius Funds" with offices in Cypress?

  • Report this Comment On November 20, 2009, at 11:25 PM, ashishchugh wrote:

    Forget China, invest in India. What China is today - India will take atleast 5 years to catch up, which means huge Infrastructure development on the next 5 years and sustained thereafter given the length and breadth of the country. Corporate Governance, Disclosures and Transparency is much better in India compared to china. India may turn out to be one of the best performing markets over the next 5 years.

  • Report this Comment On November 21, 2009, at 9:39 PM, TMFBreakerRob wrote:

    For those interested in *not* receiving Fool emails, go to "My Fool" at the top of the Fool home page and click on "My Settings". You have the opportunity there to opt out of getting the emails.

    Good article, Tim. I was going to point out that there are "cheap" but attractive foreign companies, but you of course covered that base.

    I'm looking forward to your India trip. If your Indian recommendations are even half as profitable as the Chinese ones, it'll be stunningly good. Thanks!

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