It weighs 2,700 lbs, shoots from 0 to 60 in 3.7 seconds, and travels 245 miles per charge… It’s the Tesla Roadster, an all-electric vehicle.

Innovative markets, such as the car-manufacturing industry, high-tech and biotech industries, are attractive investments. But take caution, “sexy” can most certainly drive your portfolio over a cliff.

While the Tesla Roadster performs as good as it looks, it’s not without drawbacks. For starters, the Tesla Roadster 2.5 is no longer manufactured. The last one rolled off the line in January 2012. The car body was based on the Lotus Glider, and Tesla’s contract with Lotus Cars expired in December 2011. The supercar won’t be in production again until 2018 or so.

Also, the battery charger isn’t interchangeable with the Tesla Model S, and therefore the Roadster can’t use the supercharging stations that Tesla keeps touting. These issues make the ownership of the car a gamble.

And when it comes right down to it, owning stock in the company seems like the same thing: a bet on something sexy where the outcome is unknown.

Are Innovative Markets Worth the Bet?

Tesla went public on January 1, 2010, at $17 per share. The all-time high for the stock was $265 in March. It currently trades hands at about $190. At this price, Tesla is a $22 billion company… at least on paper.

Tesla lost almost $50 million in the most recent quarter, and has only posted a profit by selling tax credits to other companies. For an automaker that sells a few thousand cars a quarter, this doesn’t sound like the stuff of dreams.

But the all-electric car manufacturer trades on the idea that Tesla can revolutionize the car industry by manufacturing affordable, attractive, low-polluting (generating the electricity does cause some pollution) vehicles.

Will it work? Who knows! But millions of people are willing to bet on it, even though the numbers (revenue, earnings, expenses) don’t support anything near a $100 stock valuation, much less $200 or $300.

Innovative Markets: When to Invest

I think most people fall in love with ideas like Tesla, and there’s nothing wrong with that. The company could be worth some gambling money, and it might pay off handsomely. But that’s not the same as investing.

The notion of finding sexy, cool-sounding companies like Tesla and loading the boat with their stocks is a good way to go broke. One or two might do well, but most will fizzle out.

The better approach is to develop or use a systematic investment selection process that identifies stocks with the most potential for gain, the range of prices that are good for buying the stock, and — very importantly! — when the stock should be sold.

This might sound like a lot of work. That’s because it is, and it’s also the reason most people don’t do anything like this. Instead, they buy what sounds good, or sexy, or revolutionary. But as an investor, you have to know your limitations.

It is entirely possible that a good, sexy, revolutionary company is a great investment. It’s also quite possible that a boring, old-line company has the best chance of fattening your wallet.

At the end of the day, what would you rather have: ownership of a cool company that wants to take the world by storm, or a bigger investment portfolio?

Sometimes it’s hard to talk ourselves out of buying story stocks. After all, they are stories. We read about them in the news, see them on TV, and often watch their stock prices shoot to the moon. What’s not to love? Of course, there’s the other side of ownership.

Buying a stock because of the story robs you of the logic necessary to know whether you should hold on when things go south.

Was Tesla worth $265 per share at the top? Should the buyer at that price still be holding on, now that the shares have fallen through $200, more than 20% down? These are the kinds of questions you don’t want to wrestle with.

Make your life easier, and your profits bigger. Employ an investment system that you trust, and stick with it. If you still feel the need to be involved with a story stock, go buy a Tesla car… at least you can drive it around, and you’ll look cool doing it, no matter how old you are.


Follow me on Twitter @RJHSDent

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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.