How do I find the next hot stock?

It is really very simple. You build a time machine, one that will allow you read tomorrow’s newspaper today. You head off one day into the future and pick up a newspaper and turn to the investment section and see which stock had a big gain. Then, you get back in your time machine, and return to the present and buy the stock destined to go up. Failing that, don’t even try to find tomorrow’s hot stock. With investing, patience is most often rewarded. The temptation is to chase the hot stock, the hot fund; to invest in the “next Microsoft” that is about to go public, or catch the market as it is about to turn, as some people seem to believe it is now. Those are almost always bad ideas. If you have a long-term investment plan, you should stick to it. If you don’t, create one. Investing on impulse invariably leads to higher transaction costs—the more you trade, the higher your tax rates—and even if you make money, your gains will be taxed as ordinary income if you hold them for less than a year. You’ll also have an unbalanced portfolio. You end up with too much of your assets in whatever is the hot sector at the moment. There was an college football coach who was asked why his teams always ran the ball. “When you put the ball in the air, three things can happen—you can complete the pass, it falls incomplete, or it is intercepted—and two of them are bad. I don’t like the odds.” Keep that thought in mind the next time you are tempted to fiddle with your investment portfolio for the sake of chasing the next big thing.