Investors shouldn't bet on concept stock

In a market where confidence is in short supply and uncertainty has become a fixed feature, many investors are turning to the occult, banking their hopes on the mythical magic of so-called concept stocks.

Even though the myth surrounding these concept stocks has been blown time and again, there is no shortage of stock market punters willing to bet big money on nothing more than a hunch. Such a speculative mentality is a major force in a stock market that has been searching in vain for its direction for a while.

During that time, stock market fundamentals have largely been ignored and economic realities distorted to suit the whims of the big market players. The latest craze, whipped up by the hoard of gullible commentators and dubious investment experts, involved stocks that were supposed to benefit the most from the free trade zone in Shanghai, as well as those free trade zones that are supposed to be in the pipeline at Tianjin, Xiamen and some other coastal cities.

There must be investors who have made money from the yo-yo price performance of such stocks in the past few months. But most investors who bought the shares based on the hype have been left scratching their heads wondering why the prices of many free trade zone concept shares have plunged back to earth.

It's important to understand that concept stocks are driven entirely by speculation and herd instinct. It's rash to buy the shares of a company simply because it happens to be located in a free trade zone or involved in a related business, such as logistics or trading.

Many investors who rushed to buy concept stocks paid little regard to the capabilities of the companies to capitalize on expected changes in the business environment. Past experience has shown that not all companies can survive a major economic restructuring. Those that fail to adapt do worse despite the many opportunities a restructuring might have promised to bring.