People love a hot story, and the financial markets always oblige. But by the time you hear about it, you've usually already missed out on some of the most significant gains.
Much of the popular appeal of financial television results from the way it treats every day as a significant event. Whether the market finishes up 10 points or down 10 becomes a critical issue in each and every market session. And when certain types of investments heat up, the media promises that you'll be the first to hear about it.
The last to know
In reality, however, by the time most trends hit the financial pages, they're already old news in the investing world. Consider a market that many have talked about lately: gold. In the past year or so, gold has hit the $1,000 per ounce twice, reawakening interest in the yellow metal as well as gold stocks like Yamana Gold (NYSE:AUY) and Barrick Gold (NYSE:ABX).
But the fact is that gold's recent performance is just the most recent part of a much larger bull market that arguably started back in 2001, when gold was trading below $300 per ounce. Those who bought gold back then have a 200% gain in hand. Even if gold prices continue to rise, you still wouldn't do nearly as well as those first investors -- the price would have to move up to over $2,700 an ounce to triple your money, while the same rise would turn their 2001 investment into almost a 10-bagger.
Buy while it's warming up
That doesn't mean you have to get in on the ground floor of every investment you make. For instance, those who've searched for a bottom in housing stocks like Toll Brothers (NYSE:TOL) and Pulte Homes (NYSE:PHM) have been frustrated for several years now since it seems as if every bounce for shares has been followed by a trip back down. Insisting on buying only at the bottom will mean you'll miss out on many opportunities just because you were a little late to the game.
Often, though, you'll end up catching the top of a trend that's about to reverse. For instance, in early 2008, investors in the then red-hot market for agricultural stocks were still buying shares of companies like Monsanto (NYSE:MON) and Archer Daniels Midland (NYSE:ADM). Yet while early investors made some monster profits, those who came in toward the end of the bull run got stuck holding the bag on substantial losses.
Release your inner skeptic
When you see a hot news item, ask yourself why it's running now. If someone touts gold at $900 per ounce, were they even more enthusiastic when it was trading below $300? When an analyst suggests Baidu (NASDAQ:BIDU) stock at $220, were they just as excited in 2006, when it was trading under $50 -- or are they just jumping on the popular bandwagon now?
It's easy to let media hype convince you that you have to own an investment right now. But before you let emotion rule over your common sense, take a moment to consider whether there's any profit left. There are much bigger gains to be made from discovering the next big opportunity before it makes the front pages than by trying to eke out the last few percentage points from a bull market that's already happened.
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