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Millennials: Buying Snap Inc (SNAP) Stock Broke a Cardinal Rule

Countless young investors bought SNAP stock simply because they like Snapchat

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TD Ameritrade Holding Corp. (NASDAQ:AMTD) announced Q2 2017 earnings April 19. Its conference call with analysts included remarks about the positive effect the Snap Inc (NYSE:SNAP) IPO had on young people opening new brokerage accounts to buy SNAP stock.

Buying Snap, Inc. (SNAP) Broke a Cardinal Rule
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TD Ameritrade’s trades per day during the second quarter set a record of 517,000, thanks in large part to the frenetic buying and selling of SNAP stock, including 200 million shares on the first day alone.

“Snap was good for us in a lot of ways. We saw strong trading, we saw a lot of clients that opened new accounts that Snap was their first trade,” said TD Ameritrade CEO Tim Hockey in its conference call.

“People buy what they know, and younger people know social media.”

Why Millenials Bought SNAP Stock

Millennials who bought SNAP stock were following the advice (sort of) of former Fidelity Magellan portfolio manager Peter Lynch, who ran the large mutual fund for 13 years, between 1977 and 1990, delivering a 29% annualized return.

I say “sort of” because most millennials have probably never heard of Peter Lynch and, even if they had, Lynch’s “invest in what you know” mantra is widely misinterpreted by investors.

“I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock,'” Lynch said in a December 2015 MarketWatch article. “People buy a stock and they know nothing about it. That’s gambling and it’s not good.”

So, here you have investors buying SNAP stock because it’s what they know, something TD Ameritrade’s CEO has identified as a cause for his firm’s increased trade volumes.

The problem, as Lynch sees it, is that there’s knowing about a stock and then there’s really knowing about a stock. The kind of under-the-hood research that gives you enough confidence to buy and hold a stock for a decade or more.

Snap Inc Is About More Than Just Using Snapchat

Young investors who bought Snap might have followed Lynch’s mantra, in theory, but they failed to follow it in spirit. Neglecting to fully comprehend Snap Inc’s precarious financial position and lack of profitability — analysts estimate it will make its first annual profit in 2021 — most definitely could come back to haunt them.

Sure, they might have read the section of the Snap Inc. prospectus that warned “it may never achieve or maintain profitability” and reflected on this warning, but I highly doubt it.

The reality is that anyone who bought SNAP stock, young or old, broke one of the cardinal rules of investing: Buy profitable businesses at reasonable prices.

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Article printed from InvestorPlace Media,

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