First Time Investors Who Bought Snap Are Getting Burned

It must suck to buy your first stock ever and have it go down right away. But thats what happens when you buy Snap (the company that owns Snapchat) without doing some real homework to find out whether what you are buying is a smart investment.

I assume that many millennials who had never bought any stock before were a decent percentage of those that chose to buy Snap. Caught up in the hype, they just couldn't stay away from putting their money down on a company who's future is very uncertain.

Anyone who bought Snapchat that first day paid a minimum of $24 and could have paid as much as $29 and change. And after that first day the stock has done nothing but go dow. It now sits at $20 and change which represents a minimum loss of at least 15% in one short month. Not a fun way to start out if you are a first time investor.

But this bad investment could have been avoided if only some research and thought were done:

1) The most fanatical Snapchat users are 12 to 14 year olds and they are NOT the target market most advertisers want because they don't bother looking at ads.

2) Snap itself went out of its way to classify itself as a "camera" company in the initial S-1 documents filed with the SEC. A camera company? I thought Snapchat was a social media company and their unwillingness to call themselves that might have put up a red flag or two.

3) There where dozens upon dozens of articles posted and easily found on the Internet prior to the IPO that detailed why SNAP was a lousy investment. These weren't written by suspect and unheard of websites but by many mainstream financial news outlets like Forbes, Wall Street Journal, Business Insider and others.

What I'm saying is that we have a repeat of what happened with Facebook, Twitter, and Alibaba which were each stocks that brought in a lot of novice first time investors. In Facebook's case, the stock went down initially but turned out to be a great long term investment. Twitter has been a disaster and Alibaba has turned to all right if you were willing to withstand a frightening ride down before going back up. But in each case, investors have had to weather some scary price drops.

Snapchat may or may not end up being a long term investment but with the short attention span and propensity to make frequent trades we see in today's millennials, it is doubtful that many of them will own the stock long enough to make money on it if the stock ever goes go back up.

Some Investors Buy Stocks Only Because They Think/Hope Those Companies Will Be Acquired

Can you predict what companies will get bought out by other bigger companies? Its a hard thing to do and there is a lot of risk because without any insider information, it is unlikely that a normal everyday investor will be able to predict such things. Buying a stock just for the chance that it will get bought out at a higher price is something investors do, but with a low success rate.

Many stocks are periodically buoyed by rumors that they will be bought out and it is one of the main reasons why Twitter's stock keeps going up and down. You see, when a rumor spreads that there is a new buyout investor interested in Twitter, investors pile in hoping that the buyout price will be higher than the stock trades for currently. But with Twitter, those rumors never seem to come to fruition and alas, the stock retreats back down until the next rumor of a potential buyer surfaces.

Some other companies have a history of being talked about as buyout candidates and it undoubtedly helps their stock prices:

1) Netflix is often discussed as a target of Apple as Apple seems to be interested in getting into the content creation game. Buying Netflix would solve that problem in one fell swoop. Google and Disney are two others that could be interested according to the rumor mill.

2) Barnes & Noble is suffering, as all bookstores are, because Amazon continues to grow and gain popularity. Now that Amazon seems intent on opening real stores in select cities, might they just buy B&N and save the trouble of building their own stores? Its possible and some people think it could happen.

3) Lulumon & Under Armour are being bandied about as a possible merger due to neither doing that well on their own. UA especially, is struggling as their most recent earnings report caused the stock to drop more than 20% in one day. Could the two companies decide that together they are stronger than they are separately? (A merger might not make either stock holder any immediate money, unlike buyouts that are usually done at higher prices than the company being bought trades for)

4)  Sears is struggling and has been for years. The stock is a small fraction of what it was 10 years ago. But could some company come in and try to save at least part of the very famous retailer? Obviously what Sears has been doing hasn't worked but the "Sears" name is still a well known brand that could be worth the risk for a company that wanted to save the parts of the business that are still making money.

Buying a stock in hopes that it will get bought out at a higher price is a strategy that is very hard to succeed at. Its something that only sophisticated investors should try and even then, the failure rate will be high. For most investors, sticking with picking stocks of good companies that will go up in the long run is by far the better course of action