Dumb: “The iPod is selling a lot so I’ll buy Apple stock”

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I just saw a segment on CNN about how the iPod is selling like crazy this Christmas season. 4 hours later (!), after seeing the same segment, one of my friends asked me if he should buy Apple stock.

It’s a pretty common question and the variations go something like…

“I’ll buy [COMPANY] stock because it has [NEW PRODUCT] coming out!”
Examples: Nintendo/game system; Apple/iPod/G5/etc; Dell/cheap LCD TVs;
Genentech/new drug; ANYTHING!

It sounds intuitive, actually. The problem is that you know it–and so does everyone else. The market (e.g., other investors) has already calculated this potential and “priced it into the stock.” You can find that phrase here, here, here–everywhere!

If you know a new product is coming out, that alone isn’t enough to make it an investing decision. Remember, everyone else knows that and the stock price reflects it. (If you know it and no one else does, that may be insider trading. Cool, but usually illegal.)

On the other hand, if you really think Apple (or whatever) is good for the long term, then that’s a good place to start your stock research.

BOTTOM LINE: PLEASE DON’T BE STUPID. Investing in a company just because of one product is very, very dumb and if I hear about it, I am going to scream at you.

Now what?

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