Stocks that command a lot of attention in the media should be viewed with some suspicion by long-term investors.
Investing in the stock market for the long-term is about finding great companies with stocks priced at a level that leaves room for growth of share price and a profit for long-term investor.
One of the easiest traps to fall into is paying attention to the hot stock of the day but not thoroughly researching the company's fundamentals.
It almost goes without saying, but stocks that are in the news every day, assuming the news is good, are often overpriced and not good candidates for a value driven investor.
This doesn't mean there's not a great company behind the stock, however if investors and speculators have bid up the price there's a good chance at some point the market will make a correction and the stock will drop significantly in price.
While this is a good rule of thumb, you must confirm it for yourself. There are times when a great company has a great stock with a great future in plenty of room to grow in share price.
However, most of the time your valuation will show that the prices have risen too high and past any reasonable expectation of a long-term investment candidate.
Which brings long-term investors to a dilemma: do they automatically write off stocks that are frequently in the news as almost certainly overpriced or spend the time to look deeper into the company to see if there remains room for growth.
Usually value driven investors are looking for those stocks that have not been appreciated by the market and are trading at a price below their intrinsic value.
Still, we must all be open to the possibility that a frequently reported stock could still be a good long-term investment.
Standing in our way of making this decision is often our emotions that may be caught up in the excitement surrounding this darling of the stock market or our assumption that the stock must be overpriced.
Companies that introduce new products or services others will begin calling game changers and pretty soon everybody would like to say they own a piece of the company
Historically, jumping at the latest shiny object (stock) usually doesn't work out so well for the long-term investor. The long-term investor is looking for stock that will continue to grow over a long period of time and provide good value in the future.
In the mid-to late 2000s, Apple became a darling of the news media with the introduction of the iPhone and later iPad, which drove the stock to record highs.
According to the rule of thumb long-term investors should have avoided Apple, because of all the media attention it was receiving. Yet in the years from 2005 to 2012, Apple stock more than tripled in price confounding conventional wisdom that said it could not grow that quickly or sustain the growth.
Of course it is easy to look back and make great predictions about what's already happened. However a close examination of Apple any point during that time left most people with the opinion that Apple had more room to grow.
Apple at least up to that point may have been the exception that proves the rule. However it is possible to find other stock that may be receiving a lot of media attention yet still offers value to the long-term investor.
Determining intrinsic value of companies on the grow is even more challenging than doing a regular analysis.
Long-term investors have to be very careful that extrapolating future growth from past performance does not involve more emotion than research.
The basic lesson is just because something appears to be too good to be true doesn't mean it's not true, however always verify.
