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Stock mania should be avoided

Investors need to be wary not to get caught up in market exuberance that may lead to the purchase of significantly overpriced stocks, a senior wealth management executive has recommended.

A senior wealth management executive has warned investors against being caught up in market exuberance to avoid overpaying for a particular share without receiving commensurate subsequent returns.

“The important thing is you’ve just got to be very wary when there is a big mania everyone wants to chase after. It’s very hard to resist that mania, but a good fundamental investor should do so and try to avoid overpaying for stocks trading at incredibly high prices,” Perpetual listed investments senior manager James Holt told delegates at this week’s Australian Shareholders’ Association Investor Virtual Conference 2020.

“I know there is this concept of FOMO, fear of missing out, which is irresistible sometimes, but of course just because a company has a good idea it doesn’t necessarily mean it makes a great investment.”

Holt cited the fortunes of two companies in recent times as classic examples of this phenomenon.

“Enron was feted as the most innovative energy company of its day and then it went broke spectacularly in 2002,” he said.

“MCI Worldcom was a gigantic telco company [and had] strong growth right up until 2001-2002 [and] went broke too.”

With regard to present-day stocks, he identified electric car manufacturer Tesla has the potential to be a company experiencing market exuberance and that it could struggle to turn its good idea into strong returns for shareholders.

“We don’t know what the future holds for Tesla. We do know it’s obviously in a good space, electric vehicles, it’s obviously going to experience growth, [however] it never has made an annual profit, which is a concern, but it still has time on its side,” he noted.

“But we’ve got to be wary of all of these things when we’re looking to invest.

“Elon Musk, I think he’s a fantastic entrepreneur and he’s got some great ideas, but again just because it’s a good idea doesn’t necessarily mean it’s a good investment.”

According to Holt, the value of the company has to be framed with some perspective.

“It’s about $380 billion in value. It’s enormous. But that means today the value of Tesla exceeds Hyundai, Mercedes, Porsche, BMW, Mitsubishi, Mazda, Subaru, Nissan, Honda, Fiat, Chrysler, GM (General Motors) and Ford combined,” he pointed out.

“So there’s a tremendous amount of value in the company [and] shareholders have rushed into the company. [But] will it justify its value?

“It’s got to do incredibly well to justify the current share price.”

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