Few things evoke the thrill of investing more than the prospect of unearthing the next Amazon, a diamond in the rough, poised to disrupt an industry and deliver exponential returns.
There’s an intoxicating allure to stories of companies like Amazon. They appear overvalued for years, only to defy gravity and reward those brave or foolish enough to hitch a ride.
Yet, for every Amazon basking in the glow of success, there exist countless others that have fizzled out, their promising sparks extinguished in the harsh light of business reality.
Survivorship bias can be a deadly pitfall for investors, blinding us to the graveyard of ventures that couldn’t sustain their initial hype.
Hence, investing in “hype stocks”, particularly those within hot sectors like artificial intelligence, requires caution. Investors might easily be fooled by the illusion of rapid growth and an intriguing use case, but not all that glitters is Amazon gold.
So, should you completely shun these hype stocks?
Not necessarily. The key lies in the art of position sizing.
Where the business is in its nascent stage and the range of outcomes is wide, you want to make sure it doesn’t take up a sizable chunk of your portfolio.
Give it time to prove itself to you. Validate your thesis overtime and add to your positions overtime.