Why a Buy and Hope Strategy Will Ruin Your Returns

institutional investors

In his 1928 State of the Union address, US President Calvin Coolidge said America had never ‘met with a more pleasing prospect than that which appears at the present time.

At the time, America had a lot to look forward to. World War I was thoroughly behind them. A new technology, the radio, had been invented. Cars were growing in popularity and becoming cheaper every day. And the stock market was growing at almost 20% each year.

How could you not be optimistic?

Between 1924 and 1929, the Dow Jones Industrial Average quadrupled. At the time, it was the longest bull market ever recorded. Some thought it would last forever. And because investors believed this to be a certainty, they decided to load up with everything they had.

Thanks to a financial invention called buying on margin, investors could now invest even more than they had. They could borrow additional money from their brokers and buy stocks. The added leverage enhanced returns, giving investors enough to pay back their loans and then some.

I like to call it the ‘buy and hope’ strategy.

Why the buy and hope investing strategy wont work

While the coming market crash in 1929 wiped out most of these hopeful investors, today we’re still not rid of them.

Take a company like Tesla Inc. [NASDAQ:TSLA]. The company has a great brand and its run by a very intelligent guy. But surely it’s an investment you’d want to stay away from.

The company struggles to keep to its deadlines and can barely turn a profit. In fact, recently Tesla announced that their new Model 3 would be delayed.

As reported by Bloomberg:

Tesla has delayed a target for its critical Model 3 sedan as production setbacks at its battery Gigafacatory contributed to record cash burn by Elon Musk’s electric-car maker.

The company now expects to make about 5000 of the cars a week by late in the first quarter of 2018, rather than by the end of this year, the chief executive officer wrote in a letter to shareholders on Wednesday. The main constraint holding back output is on the assembly line that packages battery cells at Tesla’s Gigafactory near Reno, Nevada.

Elon Musk wrote:

While we continue to make significant progress each week in fixing Model 3 bottlenecks

‘…the nature of manufacturing challenges during a ramp such as this makes it difficult to predict exactly how long it will take for all bottlenecks to be cleared or when new ones will appear.

While Tesla’s shares have dropped 10.7% since their high in October, the stock is still up more than 50% for the year. How can investors believe that Tesla is worth US$53 billion when it cannot keep to schedules and continues to generate losses?

While some say Musk has his own cult following, I doubt all US$53 billion is betting on Musk alone. A large majority of shareholders share Musk’s vision — a future of electric cars.

But basing your investments on loose future projections was one of the primary reasons Wall Street crashed in 1929. Surely investors don’t want to make the same mistake with Tesla?

And according to award–winning financial advisor, Vern Gowdie, there are many other stocks you shouldn’t touch with a ten foot pole. Find out if you’re holding these five fatal stocks by clicking here.

Cheers,

Härje Ronngard,

Junior Analyst, Markets & Money

Härje Ronngard

Härje Ronngard

Harje Ronngard is a Junior Analyst at Markets and Money.

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.  

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