Rules of the Game: Caution on the 'Must-Haves'

 | Aug 08, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

FB

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aapl

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goog

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yhoo

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tasr

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ebay

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mnst

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gmcr

When I was in Santa Monica last week for a Dimensional Funds seminar, I also had a chance to hang for a bit with Rocco Pendola, the social media director of TheStreet.com. He told me a story about a CNN security guard who put $1,000 into Facebook (FB) on its first day of trading.

The context: The media were focusing on the stock's impressive rally that began on July 25. But Rocco contends (and I agree) that the stories of small individual investors, like the security guard, are more indicative of the euphoria and hype (OK, those are my words, not his) surrounding widely-touted stocks like Facebook. Here's Rocco's story

 I was thinking about the hypey-stock phenomenon after I talked with Rocco. I have plenty of experience in this arena, having taught growth-stock trading seminars for years before running to the light of a balanced, allocated, indexed portfolio. It wasn't all that long ago that Apple (AAPL) was the gotta-have-it stock. Other flavors of the month, at various times, were Google (GOOG), Yahoo (YHOO), EBay (EBAY), Taser (TASR) and Monster Beverage (MNST).

I don't have any moral or ethical objection to trading growth stocks. It can be fun and exciting, and sometimes even profitable -- assuming the trader times his or her buys and sells exactly right.

What I do object to, however, is the idea that certain stocks are "must haves," and are the ticket to riches. In some circles, you'd think that anybody who missed out on Monster Beverage (the company formerly known as Hansen's Natural) would be facing a lifetime of financial ruin.

The financial media and their partners -- Wall Street and brokerages -- are complicit in whipping up people's emotions about a particular stock. Occasionally, it is possible to get people worked up over something stodgy like a DJIA component. But most of the time, it's a high-profile growth stock that is the subject of a feeding frenzy.

A few days ago, the iPad app for a popular market-oriented news weekly (I sound like a "Wheel of Fortune" contestant with descriptions like that) directed me to a some stories, which, I admit, caught my attention. (See, even though I'm aware of the manipulation, I still fall prey to it!)

One was about Green Mountain Coffee Roasters (GMCR). This stock interests me for a couple of reasons. First, I am pretty much in love with my Keurig machine and all the different K-Cup options. It feels like I'm regressing several decades when I visit my parents, and have to manually load the ground coffee into a filter.

Second, back in my trading days, I actually did make some money on Green Mountain. Did it change my life? No. Was it fun? Sure.

In his story, Rocco mentioned buying one share of Facebook on its debut day, just to participate in the hoopla. There is nothing wrong with participating, in a limited basis, in high-profile stocks and IPOs.

But keep in mind that brokerage firms want you to be actively trading the high-profile names on any given day.  There's plenty of support for you to be doing that, rather than staying the course with a balanced index-based portfolio.

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