Why Investing in Hopes of a Single Outcome Can Be a Huge Mistake

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When picking stocks to invest in, it can be easy to gravitate toward a particular narrative. But if that positive narrative hinges on a singular binary outcome (a certain event happens, or it doesn’t happen), it can lead in disastrous mistakes. In this Motley Fool Live segment from “The 5” recorded on Oct. 1, Fool.com contributors Jason Hall and Jon Quast discuss the issue with trading a stock based on a binary outcome.

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Jason Hall: Infrastructure week, guys, I think we’re like 27 years into infrastructure week. Going sideways, we have bipartisan support for it. Everybody knows that in the US, we need to spend tens of billions of dollars to improve our infrastructure, but Congress just can’t seem to get out of its way. But we’re not going to talk politics, we’re not going to talk about our own partisan positions here. That’s not what we do. That’s not what the good Fools at home are here to see.

Let’s talk about investing mistakes. Actually, what I’m going to do because I think this was just stunning because this is like one of those things where people look for the trade. How can you profit off of the thing? Here’s some of the most popular Googled infrastructure stocks and click on a bunch of articles just to see what people in the financial media have been writing, and these are some of the most popular ones. This is what the stocks have done over the past month. The infrastructure trade, guys, has not worked out. A lot of it is tied to the fact that people were looking for a specific outcome. Sometimes, we look for a binary outcome, sometimes we look for a specific thing. We’ve all had an experience where we lost money, we made a bad investment, largely tied to a single thing. Talk about those mistakes. Jon, do you want to kick us off?

Jon Quast: Yeah, I do and the company that I’m going to talk about here is GoPro (NASDAQ:GPRO). I’m a surfer. When GoPro first came out, really fell in love with the product. You could take it in the water, take pictures of your surfing session or video, whatever you want to do, high-quality stuff. GoPro, I was a new investor at the time. I’m going to show you guys what I was looking at here. This is the chart of GoPro from when it went public to where I was buying it. I actually started buying around in here. After, it had fallen below $50 per share. Why was I interested in GoPro? Well, it was down. You want some something cheap. You want a good stock that’s cheap.

Hall: Buy on the dip, baby. Buy on the dip.

Quast: Exactly. I was real smart. Then I started aggressively accumulating here. The reason I was accumulating aggressively is because they were preparing to launch a drone product, so a brand new product, and they are also going to upgrade their cameras. The HERO4 was the newest at the time, and it had been a while they’re coming out with the HERO5. To me, this was going to be just in time for Christmas and they were going to sell a boatload. That’s really all I understood about the business. I can’t say that I understood the business fundamentals more than that. I can really appreciate.

Hall: That in and of itself says a lot, right?

Quast: Exactly. For that reason, I can really appreciate the meme stock traders a lot who are a press release comes out and it’s buy, buy, buy, buy, buy, get caught up in the hype. I was that guy. At one point, over half of my portfolio was GoPro. Mistake number two, over-allocation. This is what GoPro has done since. They wound up not making their product releases in time. They had a problem. They weren’t able to get it to stores in time for Christmas holiday. They wound up not selling anywhere near what they thought. They had to lower prices, profit margins took a hit, and this is what GoPro stock has done since.

It was a terrible thing, two lessons there. Definitely don’t over-allocate to one stock. This is why we say diversify. If something is already five percent of your portfolio, maybe don’t buy any more of it because it sets your portfolio back years when you’re wrong. That is the case with GoPro early on in my investing career. Then two, if your whole buy thesis is predicated on a single event happening, which in my case selling a boatload of drones at Christmas, if your whole thesis is predicated on one thing and that one thing doesn’t happen, that’s a problem. Always make sure that you have multiple outcomes.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.