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WSJ: 'Buying Hot Stocks Is a Really Bad Strategy'

By    |   Sunday, 30 November 2014 10:04 PM

When a stock is climbing, its trading volume often increases too, as investors want to get in on a good thing. But trading volume can rise on the way down too, as investors want to get out of a bad thing.

So don't go chasing after a stock just because it's heavily traded.

Of the 20 companies with the highest average trading volume as a percentage of total shares outstanding this year through Tuesday, 14 fell during the period, according to FactSet, The Wall Street Journal reports. The S&P 500 index climbed 11.8 percent during that period.

An investor who invested equally in all 20 stocks would have lost 8.5 percent, including dividends, according to Morningstar, The Journal reports.

"Buying hot stocks is a really bad strategy," Roger Ibbotson, a finance professor at Yale University, told the paper. "There’s too much interest in them."

To be sure, hot stocks can soar, but they can also crash.

Tesla Motors is one stock that has ridden a bit of a roller-coaster. It has soared 626 percent over the past two years, but over the past three months it has dropped 9.3 percent.

While the company's shares closed at $244.52 Friday, Morningstar analyst David Whiston sees fair value at $200.

"Tesla has the momentum and charging infrastructure to be the dominant electric vehicle firm, but we do not see it having mass-market volume for at least another decade," he writes on Morningstar.com.

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"Buying hot stocks is a really bad strategy," Roger Ibbotson, a finance professor at Yale University, told The Wall Street Journal.
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2014-04-30
Sunday, 30 November 2014 10:04 PM
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