frugal

Can we make money by buying companies that don’t?

What am I talking about? Sounds absurd right? Well, not to many traders who trade based on investors. There are many firms which are deemed to have “growth potential” and thus should have a huge upside and many people want to jump onto the bandwagon so that they will not “miss out” and be able to catch the next “Amazon”. But it is not like that. That is not how stocks are worth.

Jim Cramer, the host of Mad Money, has mentioned that the “electric vehicle, minus Tesla, has started to burst”. During the surge in zero emission vehicle firms 2 months back, companies like Nikola were riding the wave as well. Seeing monstrous rise in their stock price. Although it has recently come back down, it still has an insane PE ratio of 650. It is just unsustainable.

Nikola has not even made any vehicles yet, and they already have a market cap of $14 billion. Outside of Tesla, many other “zero-emission” vehicle firms have failed. They include Faraday Future and Nio.

I am writing this article as a reminder for investors. To stay rooted to their initial goal. Find a good, stable, profitable company. Not speculative plays. You may want to include it in your portfolio, but it should only take up less than 10% of your portfolio. Even so, your portfolio should have accumulated to critical mass before you do so. Yes, loss-making companies like Sea Limited and Lemonade can be enticing for their potential. The potential for a multibagger is so nice to hear. But, you probably do not know the market as well as you think. Nobody does. And because of that, you are probably better off with an index ETF.

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