This risk/reward decision also applies to investing. Should you stick to companies with good track records, strong management teams and predictable earnings? Or should you invest in an underdog stock? One that no analyst on Wall Street is recommending…that gets no respect…that is totally unloved…but that seems incredibly cheap and unlikely to go any lower?
I’ve learned from painful experience that a stock can always go lower, no matter how cheap it seems. So valuation alone is not a good reason to buy a stock. But if you can identify several catalysts to turn performance around (such as a management change, a new product, expense cuts, debt reduction, etc.), even if only one or two of these actually occurs, market sentiment can totally change on a stock and turn your underdog into a star performer.
It depends on your risk tolerance. Going with the safe bet may help you sleep better at night. And you probably don’t want to load up your portfolio with a lot of high risk stocks. But winning on the occasional long shot, just like VCU making it to the Final Four in 2011, is mighty sweet.
What’s your investment style? Do you ever root for the underdog? Or do you prefer the higher odds of a more probable result? Tell me what you think on Facebook.