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The Perils of Chasing a Stock Blockbuster

IT MIGHT SHOCK YOU TO learn that in its Class A category, the oft-revered stock of Google/Alphabet (ticker: GOOGL) hasn't had such a hot 12 months. Since July 2018, it's down – that's right, down – 4%, trading at roughly $1,100 per share. Then again, maybe you did know, assuming you kick yourself on a regular basis for missing the ride before Google took off.

When it debuted in 2004, a single share of GOOGL cost $54. And as recently as eight years ago this month, it traded at just $260. Since 2011, Google/Alphabet Class A climbed 316%, making a simple $1,000 investment worth more than $4,200. So where have all those gains gone of recent? And if the Google investing train has left the Alphabet station, what will it take to board investment's next profit express?

Welcome, investors, to the Hapless Land of FOMO: Fear of Missing Out.

Even in an unprecedented bull market enjoying a run of 10-plus years, some stock (and mutual fund) investors insist on looking over the fence and fixating on why the neighbor's grass and portfolios grow greener. That kind of irrational envy (greed, even) isn't helped when unconventional plays such as cryptocurrency have turned wing-and-a prayer investors into wealthy people. Bitcoin's run-up between Dec. 15, 2016, and 2017 multiplied a $5,000 wager into $125,000.

For the rest of us, investing must boil down to practicing principles, not arbitrary arbitrage.

"To use an analogy, I consider the idea of 'stock picking' to be a short-sighted renter mentality," says Jeffrey B. Madden, senior vice president and portfolio manager at Chicago-based RMB Capital. "Investing in a share of a company with sound fundamentals is an owner mentality."

In terms of a stock portfolio reality check, Madden suggests checking a hunch against the advice of a trained professional. In many cases, the investor chasing FOMO either goes it alone, or takes the investment crowing of a compatriot too deeply to heart.

"There is no doubt that market psychology – more specifically, making investment decisions based on emotions rather than rational analysis – is one of the great perils unskilled investors face," Madden says. "In my view, investors are wise to check their emotions at the door when entering into the stock market."

This no doubt applies at some level to Tesla (TSLA), a stock that for most of its existence has been propped up by three investing factors: the charisma of co-founder and CEO Elon Musk, the rabid devotion of Tesla drivers and irrational exuberance that overlooked the company's problems.

For nearly all of its existence, the electric car maker has failed to turn a profit, and missed manufacturing and sales goals. But that didn't stop a run-up on Tesla stock of 575% between April 2013 and September 2014. That turned a $41 share into $277, though in the last two years, the FOMOs have fled and even the Tesla investment bulls have fled.

Down 28% in 2019 and a third year over year, TSLA currently trades at $228 per share. One of four investment analysts recommend getting rid of Tesla – a fairly damning dismissal – though the Cult of Elon hasn't entirely vanished; five overall call it a "strong buy."

"Often, speculation drives these stocks too well above their true value," says Benjamin A. Jansen, assistant professor of finance at Middle Tennessee State University's Jones College of Business. "Aside from the implicit possibility of low future returns associated with being overvalued, high valuations pose a danger to investors when there are significant uncertainties that investors can't spot, such as with Tesla and Facebook (FB)."

One reliable measure comes by the metric known as price-earnings ratio, or P/E. Also known as the price multiple, it tells you how many dollars you can expect to invest in a stock to get one dollar of earnings.

Currently, P/E ratios in the market average 20 to 25 times earnings; when the number goes above, investors anticipate higher growth – or hang on to high hopes the numbers can't always justify. So while Apple (AAPL) stock has a grounded ratio of roughly 17, red-hot Amazon.com (AMZN) is at an astronomical P/E of 96.60. Yes, the stock is up 450% over five years. But are the P/E numbers in line with that?

You could argue that so long as giddy shareholders look to the future, there will always be money to prime (or Amazon Prime) the pump. But today, it's a risk factor FOMOs need to consider before making an envy investment.

Meanwhile, some experts contend that shooting for the stars in the investing shorter term doesn't represent reckless behavior, so long as it doesn't become the dominant mode for the smart investor.

"The promise of quick or huge investing returns is unlikely to completely displace the wisdom of a longer-term strategy," says Rachel Fox, a commentator for ADVFN Markets. "If anything they're likely to continue coexisting – with the short-term strategy dominating in times of economic uptick and less so in down times."

"Investors are always on the blockbuster hunt," says Stephen Hartman, professor of management at New York Institute of Technology. "Each uses their own methodology to find their prey. Enormous resources are available in these searches. Most are moderately successful at best. Those who use a proven methodology are more successful than those who have not developed a suitable strategy."

Unfortunately, FOMO investors more than occasionally plant a second foot in the realm of unconscious, unbelievable bias. According to a recent study by husband-wife professors Jesse and Jennifer Itzkowitz, many will invest in stocks closer to "A" than "Z."

"Just like choosing 'AAA Best Plumber' from the Yellow Pages, people when looking at stocks frequently overinvest in companies that have names or tickers that appear early in the alphabet," the researchers report.

Which, interestingly, gives yet another advantage to stocks like Alphabet.