Bubble Watch: Avoid Losing Money
Can you predict when a stock is about to implode? Not many people have repeatedly shown the ability to accurately predict a massive decline. But the market, especially the on line stock trading, has lots of stories to tell. And you can learn from them…
Investors were lured by an Internet world that was burgeoning at a phenomenal rate in 2000. Many experts rode on the bandwagon, but Wharton professor and author Dr. Jeremy Siegel was among a small, vocal minority that failed to respond to the siren bait.
Siegel criticized many Internet companies and their overly generous valuations, including networking giant Cisco Systems. “It’s a super company. I would probably buy it at 80 times earnings, but at 150 times earnings? We have six stocks in the top 20 (market value) over 100. We have had no history of this. Never have stocks been worth over a hundred times earnings once they’ve gotten to the size of these companies,” Siegel said.
Additionally, Siegel has given five simple tips to avoid losing money in a bubble:
Valuations are critical.
Never fall in love with your stocks.
Beware of large, little-known companies.
Avoid triple-digit price-to-earnings (P/E) ratios.
Never short sell in a bubble.
In his book, Siegel suggested that investors might want to look toward industries whose growth is below expectation and whose existence is under the average investor’s radar. Why? A flourishing company in an underperforming industry can also be explosively gainful because it will “maximize productivity and keep costs as low as possible” while simultaneously outliving competition. Sometimes you have to forget about the hype. Chasing hot companies in hot markets will often leave you smoldered!
