How To Really Ruin Your Financial Life and Portfolio

Chapter 4Assume That Recent Trends Will Continue Indefinitely

Are Internet stocks hot, or were they in 1999? That’s great. If they are hot, they’ll stay hot. Ooops. They didn’t? Well, they’ll come back. You say most are in the afterlife? Well, that’s an exception. Usually stocks that are hot stay hot.

Are social media stocks hot as I am writing this? They will stay hot. Yes, you can take it to the bank. Buy as much social media as you can and you will never regret it. There is Newton’s first law of motion that says that a body in motion tends to stay in motion. Translated to stocks, that means a sector that’s hot will stay hot.

Now, to be sure, there are laws of thermodynamics stating categorically that when an object deviates from the mean temperature in the nearby environment, it will tend to revert to that mean temperature. That is, even hot items will cool down to the general level in the neighborhood.

But that law does not apply to investing. Instead, you want to keep piling into stocks and funds that are hot. They will stay hot. Our friend, Professor Dichev, and many others in his field, have clearly demonstrated with facts and history that when a stock or a sector, or the market generally, is hot (Dichev is more about the market generally), it will cool down. Sometimes it will downright freeze.

So, when money flows into stocks are the largest, and when the market capitalization of stocks generally has risen to abnormal levels—that’s when it will soon come down. The prime ...