Newspaper article Sarasota Herald Tribune

The Problem with Speculative Stocks

Newspaper article Sarasota Herald Tribune

The Problem with Speculative Stocks

Article excerpt

THE RATIONAL INVESTOR

Some investors like to "go for the gold" by selecting stocks from among the riskiest available. Unlike high-quality, "blue chip" growth stocks, which are suitable for most investors, these speculative stocks are more suited to gamblers. People who buy them will likely see "heart-stopping" volatility that could cost them a great deal of money. Even if some of these stocks do well, their volatility often causes buyers to exit them and miss these returns.

Every equity investor has to deal with stock market volatility, but they don't have to deal with extremely high volatility and a high probability that an individual stock's price will collapse. They only need limit their stock selections to high-quality stocks with a long history of earnings growth and, perhaps, dividend increases.

Of course, like the lottery, even the most speculative stocks will have some big winners. However, few investors have the skill to find these needles in a haystack and the discipline to stick with them.

I've warned readers about dozens of dangerous stocks. From time- to-time, I construct from them a "Living Dangerously Portfolio" and report on it quarterly.

This year, I've started a new portfolio with all the dangerous stocks reviewed here from 2013-2015. I assumed a $10,000 investment in each stock at the price in the column when it was reviewed.

How has this portfolio of seven stocks done since they were purchased?

The portfolio gained $2,395 to $72,395 or only 3.4 percent. This is even though 2013 and 2014 were solid bull markets and the Nasdaq (the home for more speculative stocks) gained 5.7 percent in 2015.

While over this period the portfolio as a whole did make money, almost half of it collapsed in price. Being unfortunate enough to own a large position in just one of those stocks could wreck a portfolio.

Let's take a closer look at the stocks, starting with the dates each was reviewed. …

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