“I only buy the most popular stocks”: Most popular stocks often refer to the stocks of renowned or high visibility companies that constantly get covered in the news. Investing solely based on popularity is a fallacy since popular stocks aren’t necessarily the best or the most profitable ones. High popularity often leads to overvaluation of stocks, causing investors to buy at a high price. Many of these stocks might not provide the best returns relative to their risk level. Moreover, investing only in popular stocks means you are not diversifying your portfolio, which is a cardinal investment principle to limit losses.
It’s easy to see why this fallacy is appealing. If everyone else is buying a particular stock, it’s comforting to go with the crowd. There’s a sense of security in numbers; if so many people believe in the value of a company, then investing in it seems less risky. This is exacerbated by media hype around certain popular stocks.
An appropriate financial practice in equity investment is based on thorough research and a balanced portfolio. Instead of going after popular stocks, you should invest in companies with strong fundamentals, good corporate governance, and long-term profitability. A diversified portfolio across sectors and regions is critical to minimize risks. Regular monitoring and balancing of your portfolio based on market conditions and personal financial goals are also necessary.
Further Readings Specific to this Fallacy:
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“A Random Walk Down Wall Street” by Burton Malkiel. Book Link.
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“The Little Book of Common Sense Investing” by John C. Bogle. Book Link.
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“Momentum Investing” - Wikipedia.
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“The importance of diversification: why you shouldn’t put all your eggs in one basket” - MoneyLens
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“Efficient-market hypothesis” - Wikipedia
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“Diversification (finance)” - Wikipedia