As the holiday shopping season approaches the phrase "buy with discretion" could not hold to be truer. Shoppers, like investors, go out and buy the hottest item with little regard to price. A couple of years ago my parents went along with the craze and bought my little sister a Furby. As it turns out, she played with it a couple of times and then forgot about it. The fate of internet, stem cell, and internet browser stocks has closely paralleled that of my sister's Furby.
Too many investors buy into "hot" stocks and end up losing a large portion of their initial investment. This is due to the fact that "hot" stocks are often found in emerging industries. Investors need to understand that many of these companies will fail as their industry grows. More than 130 internet companies have closed since January. Even high profile names like Pets.com and Living.com have been forced to close. Even though this may come as a shock to many investors, this trend is common to new industries. The inception of automotive and computer companies brought about very similar events to the ones being witnessed at this time. Bankruptcy and mergers have left gigantic companies like IBM and General Motors.
So how does an investor know which companies will survive? An investor will never know with complete certainty as is the case with every stock. An investor should consider his options wisely and if he has some "extra" cash lying around, an investment on these companies might be a sensible idea. Doing research and having a diversified portfolio will undoubtedly help. This holiday season many shoppers will commit "impulse shopping." Hopefully investors will make reasonable decisions and avoid costly mistakes. So remember, when a friend or a family member tells you they have the next Microsoft make sure you do not go out and spend your lunch money or retirement savings.