Don't Fall in Love With Social Media Stocks

Investors might be smitten with social media companies right now, but think twice before diving in.

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Dean Catino
Love is an intoxicating emotion, especially in the early stages of a relationship. It's so powerful, sometimes uncontrollable, and irresistible. There's no better feeling then being smitten with that special someone!

But what if you're in love with an investment or a sector, and the excitement surrounding the emerging social media industry? Is this a remake of the fatal love attraction of the late 1990's dot-com bubble, in which investors couldn't get enough of anything with an "e" prefix or a ".com" to their name?

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There's nothing investors love more than the phrase "new growth industry" and the thrill of owning a company that's outpacing the expectations of analysts and their forecasts. Michael Santoli recently wrote an article for Barron's called "Bubble Trouble," in which he cites that there are eight leading social media companies. Three of these companies are publicly traded and five are expected to go public in the near future. The remarkable assumption about these eight companies is that their estimated combined market value is about $200 billion, but their 2010 revenues were just $3.5 billion.

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Now, who's to say that one or more of these companies aren't the next Google, whose IPO price in 2004 was $85 per share and is now over $600 per share? Time will be the ultimate arbitrator. I feel that the social media industry and many of the companies associated with it offer unique benefits and efficiencies to businesses and the general public. I also know from past history that many companies will disappoint their shareholders and not live up to expectations set by management and the investing public. When that happens you won't be able to sell quickly enough if you're leading with your heart and not your head.

As an investor, pay close attention to the expectation of revenue, profit, and cash flow for the future for your investments, but most importantly, stay diversified. Overweighting a portion of your investment portfolio to a stock, sector, or industry can make sound investment sense, however, your "investment position" should have balance within your overall portfolio and financial plan.

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Remember, every investment strategy should have a buy discipline and most importantly a sell discipline; they go hand-in-hand.

There is a lot to like about social media. Owning innovative companies that are blazing ahead, advancing new ideas about connecting people and business, and the potential to make a solid investment return is exciting, rewarding, exhilarating, and just plain fun. But it's not love. Bottom line: Love your spouse, your kids, your dog―but always strive for a loveless investment.

Dean J. Catino, CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Dean and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DeanJCatino, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial adviser prior to investing. All performance references are historical and are not a guarantee of future results. Strategies involving asset allocation and diversification do not ensure a profit or protect against a loss.