Although it is recommended to invest the bigger portion of your portfolio into “blue chip stocks”, which represent proven companies with years of good performance and stability, it can be a wise decision to invest into emerging industries or companies that show plenty of potential but haven’t proven themselves yet.
Risking a small percentage of your savings on a growing company represents a small risk (the amount of money you are willing to invest into whichever company you choose) and a very high potential reward (the company’s growth potential is technically illimited).
Blue chip stocks are known to follow the general market trends, since they mostly fluctuate with how the economy is doing. Investing in a new concept can be a great way to edge your safer investments, since the company may do well even though the economy is not, depending on its industry.
Here are a few tips to find and exploit these “homerun” stocks.
1-Where Do You Think The Future Is Heading?
The most effective way you can discover a diamond in the rough before everyone else is by figuring out something that other investors are missing. I am implying that you should try to project where the future is headed, and to try to understand what the needs are going to be.
No technical analysis, and no fundamental analysis. If a stock is doing great on paper, most serious stock investors probably know about it already. To find a homerun stock, you must use a mix of imagination, intuition, and logic.
Is what this company offering filling a need? If not, is it going to fill a need in the future? Is their idea scalable? Is there the possibility of substantial profit with their business model?
2-A Great Leader Is Priceless
One of the most important variables in a company is its CEO. Although this may seem obvious, the importance of a good leader in an emerging company may not be clear. Some companies are so established and dominating their market that it could thrive even though the CEO is not so competent. In a small cap company, this couldn’t be further from the truth.
Bigger companies have leading boards that are composed of dozens of people, all taking part in the decision making process. Small companies usually depend on the decisions that the owner or the executive officer is going to make. If the CEO makes a grave mistake, there may not be a backup plan. This is why you should do intensive research on the person that is in charge of calling the shots.
Never underestimate the influence a great leader can have on his employees. They can either be inspired to work with passion and with a strong work ethic, or they can be lead to doing the bare minimum.
3-Did The News Change Your Point of View?
If you imagine that a certain company is going to become an industry leader and an innovator, you have to hold onto that vision until you are either proven wrong, or until that vision starts fading.
A common mistake is to think that the company you have chosen as your risky investment is going to either crash or become great overnight. The moment negative reports come out, you start believing that you were wrong, or that the company just isn’t all that great.
When bad news come out, you should ask yourself the following question: “is my vision impacted by this new variable?” If not, then you still haven’t been proven wrong.
If it is the arrival of a competitor that you believe would be best fit to fill the need that you had envisioned, or the CEO has been replaced by one that you feel is less fit to be a good leader, then maybe you should reconsider your pick.