I remember buying my first stock after I had graduated from college. I had bought my first mutual fund at 19 and was now ready to dabble in stock. I had just gotten my degree in finance and was sure that I knew everything about investing. So I sat down and picked my first investment. 

The first stock that I ever bought was Krispy Kreme Doughnuts. I just knew that Krispy Kreme Doughnuts was a great investment. I was sure of it. Krispy Kreme was rapidly opening new stores and was making tons of money. Why was I so sure? Because of their financial statements? Nope, never even looked at them. Because of their competitive advantage? Nope, no clue what that was. I bought $2,000 worth of Krispy Kreme stock because of the long lines that I would see whenever the ”Hot Doughnuts Now” sign lit up. My investment thesis was lots of people equals lots of money.

Little did I know but I was wrong. Krispy Kreme was crushed by a poor business model and the low carb diet craze. Krispy Kreme was only making money by constantly opening new stores. Their same store stores sales were terrible. The excitement for hot doughnuts quickly went away once a Krispy Kreme store was open for awhile. People shunned its fattening products for low carb alternatives.  Their parking lots were soon empty and a lot of the stores have closed up. My “wise” analysis quickly turned my $2,000 into $1,400.

So, what can you learn from my story. Always do your homework. Never invest in something just because you see a lot of people there. Have you ever had someone tell you,” Invest in ABC company because you know they are making money.” The assumption is that crowded stores mean massive profits. Never invest based on random assumptions. Invest based on the fundamentals. If not, then you just may end up owning the next Krispy Kreme Doughnuts.