As investors saw with the cannabis bubble and the cryptocurrency bubble which popped prior to the coronavirus pandemic, investing on the basis of previous returns or hype can be a perilous adventure. In this ultra-high-valuation environment, now is the time for every investor to become attuned to value, as the risk we've seen in these sectors which in hindsight look like bubbles become more prevalent in other sectors today.
Sticking with a fundamental investing approach also demands one have a historical basis to buy a stock. Buying shares of a company with no sales or only the future prospect of a market which has yet to develop has been proven to be fraught with danger. Finding companies that are consistently pumping out cash flow, even without profit, one can find a fundamental basis to own such stocks and compare said stocks to each other and across other sectors as well.
With investors following the momentum trade and largely seeking out companies with high growth rates, in this lower for much longer interest rate environment, I expect bubbles to become more prevalent as investors search for returns and ignore fundamental risks. That said, if investors stay focused and avoid the hype, the pain that is felt for those who hold stocks when the music stops will be avoided.
Invest wisely, my friends.
