Before this year, the previous investing craze was cryptocurrency. Companies were touting their investments in cryptocurrencies left and right, and crypto-trading platforms were springing up like Starbucks shops. That didn't end well for everyone, but some millionaires were minted and cryptocurrency is here to stay.
The newest market hype is around artificial intelligence (AI). AI stocks are hot, and many of them have incredible long-term potential as they develop this revolutionary technology.
These kinds of stocks can create confusion for investors, since you don't know if they'll become the next Amazon or Apple or if they'll fade into oblivion, along with your money. But if you approach them like any other stock and invest for the right reasons, you can come out on top.
Don't get caught up in the hype
Hot stocks are exciting, and investors don't want to miss out on the next big thing. If you had bought Amazon when it was still unprofitable but revenue was growing like a weed and the company was making acquisitions at a rapid pace, you'd be sitting on a pile of gains right now.
Data by YCharts.
But consider many hot stocks that fell apart when the dot-com bubble burst. Others may have survived but their gains have underperformed the market in the past decade like Cisco Systems and Intel.
Data by YCharts.
Buying hyped-up stocks is risky, so only get started if you have a stomach for volatility. If you do, there are ways to benefit from hot stocks while focusing on your long-term investing goals.
Focus on the important stuff
The stocks that last over time are usually highly profitable and generate large amounts of cash. According to Warren Buffett, great companies have a long-term competitive advantage.
So when high-growth companies aren't profitable or generating cash, you want to look for their competitive advantage. You also want to see profitability improving over time.
These stocks are still risky. To maximize the chance of success while minimizing the threat posed by potential losers, diversify. Remember, you only need one stock to skyrocket to create massive gains. If other stocks fall, you only lose the amount of your investment. If you had invested in both Amazon and Intel early on, you'd be in a fantastic position right now, even though Amazon has been a much better investment over the years.
Don't forget valuation
Another key thing to consider is valuation. Overvalued stocks are likely to decline at some point no matter how great the underlying performance of the company is. And if there's any shakiness, the stock price will reflect it. Few stocks can handle a wildly high valuation for an extended period of time.
That brings us to Nvidia, the poster child of AI stocks. Nvidia might be the hottest stock on the market in 2023, and it's up over 200% year to date. Its financial and market performance has been dazzling, and the long-term opportunity looks compelling. However, shares trade near 35 times trailing-12-month sales and 110 times trailing earnings, a truly premium valuation. Every last bit of future growth has been baked into that stock price. Surely, Nvidia has a long growth runway, but what's up for debate is how essential artificial intelligence will be to the future economy and how much Nvidia will profit from it.
Consider alternative routes toward the same goal
Finally, consider how well-established companies can offer exposure to bullish trends while offering more security and stability. While Apple and Amazon may not offer the same growth potential as smaller names surging on interest in AI, they're also launching new products and investing in AI-related initiatives that could fuel their their businesses (and share price returns) for many years. And they do this without the risk that comes with sky-high valuations.
Consider these key elements before diving into the hottest stocks and trends, and you can have a balanced, risk-appropriate strategy for your portfolio.
