Rule Breaker Mailbag: On Buying Stocks at the Top of the Hype Cycle

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At The Motley Fool, our goal is to pick great companies to invest in, and one of the principles we deploy in that effort is that winners often keep winning. But there's another way to view those winners. As listener Rick writes to Motley Fool co-founder David Gardner: "We all have investing biases that can get us into trouble. Is buying at the top of the hype cycle one of yours?"

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In this segment from the Rule Breaker Investing podcast, David explains why he does buy stocks at all points on the hype cycle and considers whether that causes trouble.

A full transcript follows the video.

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This video was recorded on Jan. 31, 2018.

David Gardner: Mailbag Item No. 7: Lucky seven, although I'm not sure this one's that lucky. This is from Rick Zabrodski -- @rzabrodski on Twitter. "We all have investing biases that can get us into trouble," Rick writes. "Is buying at the top of the hype cycle one of yours?"

I think that's a great question, Rick. I'm probably going to say in some ways guilty as charged, although I want to qualify that a little bit. The very nature of rule breaker investing has you and I, and fellow rule breakers, trying to think forward, trying to ask ahead of time where the proverbial puck is headed and trying to skate our money, there, ahead of time.

It's very natural, as I've pointed out in the past on this podcast, that we're buying early and watch -- those who know the hype cycle and listened to last week's podcast -- our money go up and then down the hype cycle and then, because we keep holding, when these companies win back up, and often up for a long time afterward.

So, yes, Rick, I can definitely look back and see times that I bought at the top of the hype cycle.

Now, that doesn't mean it ends up badly. Sure enough, sometimes, it does, and I've talked, in the past, about how many losers I've had, and how I have more bad losers than anybody who picked stocks in Motley Fool history. The good news is when it works -- as we've talked about a lot in the past -- it wipes out all your losers when you find a Netflix, or an Amazon, or an NVIDIA, etc.

And the other thing I want to say about this is that I really don't try to time any of my buys, Rick, and I think all my fellow Fools know this. What we do in Stock Advisor and Rule Breakers, and what I coach you to do with your money, is be methodical. Save. Think of that story from Dave DaGecko earlier this podcast. Save every single time and move that money from your savings account into your brokerage account, or through your 401(k), and invest.

So, that means yes, I am buying at the top of the hype cycle and the bottom of the hype cycle because I'm buying every single time. That's what we do through our services. We try to take market timing out of the equation altogether. I don't think I'd be very good at that, so I don't even make it a factor in how I approach my money and my advice to you with your investing.

I really appreciate the question, Rick, and I think it's always worth being aware of. That's why I like to talk about the hype cycle and make sure that my fellow rule breakers understand the ins and outs of it. Of course, there's more information for anybody who wants to go back, and just google that podcast and listen more about what the hype cycle is. It's a link. It's available on the internet. You can write, "what is the hype cycle, rule breaker investing," and find that podcast and listen to it for the first time -- those who have not heard or learned that framework before.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Gardner owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon, Netflix, and Nvidia. The Motley Fool has a disclosure policy.