RC365 shares: a life-changing investment or a bubble ready to burst?

Mother and Daughter Blowing Bubbles

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RC365 (LSE: RCGH) shares have climbed 514% year to date. If I’d bought one year ago, my returns would be over 670%!

If that doesn’t push me to at least question whether I should pay more attention to penny stocks, I don’t know what will.

What’s even more incredible is that this return has been achieved despite the shares coming off the boil since the end of July.

So, is the market offering me a wonderful opportunity to get involved before the next rally or something quite different?

Riding the hype?

For those unfamiliar with the company, RC365 is a payments business or self-styled ‘innovative fintech advocator‘ that first joined the market in March 2022. Most of its customers are based in China and Hong Kong.

Much of the reason why it’s performed so well is down to its entry into a white-hot space. In June, RC365 announced that it would be developing new wealth management tools using AI with its partner Hatcher Group.

In retrospect, it was inevitable that investors would begin salivating. According to recent estimates, the AI market will grow to $1.3trn over the next decade. Who wouldn’t want a piece of that pie?

Red flags?

Naturally, RC365’s plans will take time and money to come to fruition. However, investors seem willing to overlook a lack of profit to reap the rewards later on.

Are they right to do so? Perhaps, but there are a lot of things that give me cause for concern here.

Anyone old enough to remember the dotcom crash will probably know that it was preceded by lots of companies trying to climb on the internet bandwagon. Most went on to fail.

Yes, a few that did survive (such as Amazon) became tech titans. But let’s be frank, the odds of picking the winners in AI are probably not in my favour, especially as it’s developing so rapidly.

Another example is the fallout from the cryptocurrency frenzy. Does the name Argo Blockchain ring a bell? A quick glance at its share price performance over the last five years is telling.

This brings me back to RC365. In reality, it’s impossible to see all of the hurdles ahead. Any estimations on costs and progress are guesses at best. And this is before any economic headwinds from outside of the sector are taken into account.

Given its potential, most listed companies will be looking to integrate AI in some way. So, why the frenzy here?

My verdict

The returns delivered by RC365 shares are undoubtedly spectacular. I tip my Foolish hat to anyone who invested even just a few months ago.

However, I’m yet to see a stock experience such a meteoric rise and not eventually tumble. Maybe “it’s different this time“. Maybe this will go down as the greatest investment mistake of my lifetime.

On the balance of probabilities, however, I’d prefer to stick to buying proven, high-quality businesses. This is especially the case if they’re currently going through a temporary period of poor trading thanks to inflation or cost-of-living concerns.

Warren Buffett‘s first rule of investing is not to lose money. It’s so important that he made not forgetting it his second rule!

I’m keeping that in mind here.

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