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 many have talked about lately: gold. In the past year or so, gold has hit $1,000 per ounce twice, reawakening interest in the yellow metal, as well as gold stocks like Newmont Mining
But 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 250% 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 more than $3,500 an ounce to earn the same return. The same rise would turn a 2001 investment into almost a 12-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 DR Horton
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 Mosaic
Release your inner skeptic
When you see a hot news item, ask yourself why it's running now. If people tout gold at $1,050 per ounce, were they even more enthusiastic when it was trading below $300? When an analyst suggests Google
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 percent from a bull market that's already happened.
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This article was originally published on Feb. 21, 2008. It has been updated by Dan Caplinger, who owns some gold coins, but doesn't own shares of the companies mentioned in this article. Google is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy is hot!