The Problem With Trading Popular Stocks

popular stocks

popular stocksSeth Godin published a post on Monday called The Problem With Hit Radio where he discussed the shortfalls of mass markets:

Mass markets and math being what they are, it’s likely that many of the ideas and products you consume in your life are in fact, consumed because they’re the most popular. It takes a conscious effort to seek out the thing that’s a little less obvious, the choice that’s a little more risky.

The music example that he uses is spot on. Let’s be honest, no one really likes that stupid Frozen song. It is popular because it gets played all the time, which leads to it getting played even more because it is popular. No one is going to argue that it is any type of artistic breakthrough. It certainly isn’t Blood on the Tracks.

The point isn’t that popular music doesn’t ever have artistic value. It’s that by only listening to popular music, we significantly limit the possibility of finding truly great music that blows our minds.

Traders can easily fall into a similar track where they only follow and trade the popular stocks of a certain time period. If you spend a significant amount of time watching CNBC (God help you), you are naturally going to gravitate towards trading stocks that are talked about more often there. If you start each morning looking at the trending ticker symbols on Stocktwits, you are going to be more likely to find patterns in those stocks simply because you are watching them closer.

Now, just like with music, this doesn’t mean that there isn’t value here. There were plenty of analysts on CNBC touting AAPL in 2004, and there are tons of really smart people actively participating in all types of discussions on Stocktwits. However, by allowing mass markets like this to dictate a stock universe, we are excluding tons of potentially great options because they simply aren’t on our radar.

Regardless of your approach to trading, you don’t want to limit yourself to a stock universe that the mass market dictates to you. There are tons of great stocks that no one is talking about. There are also lots of garbage stocks that everyone is talking about. Popularity should never impact your trading strategy.