Steering Clear of One of the Most Common Investor Mistakes
By Sasha Cekerevac for Daily Gains Letter |
One of the biggest investor mistakes, when it comes to trying to determine stock market winners, is what we professionals call “chasing returns.” This is one of many investor mistakes in which people look at what firms have recently performed well and incorporate these returns when analyzing which companies they feel will be the stock market winners in the future.
The reason this is one of the most common investor mistakes is that it is easy to be tricked into thinking that past performance is an indication of future success. Stock market winners in the past can indicate that the company is a solid performer, but this is no guarantee that the same returns will continue indefinitely.
Looking to analyze which companies will be the stock market winners in the future is a far more complex task than simply picking past outperformers. This is because the financial and economic landscape continually changes. Competition increases, which leads to a far more dynamic marketplace than many people expect.
It is easy for people to make these common investor mistakes, since it is hard to go against the crowd. When a stock languishes against its peers, it takes a lot of courage to believe that this company will be part of next year’s stock market winners.
One way to prevent making investor mistakes is to ensure that both the technical and fundamental analysis line up accordingly. Stock market winners consistently outperform their guidance levels, and the stock chart has a trendline that is positively sloping. While there are oscillations over a long period of time, the long-term stock market winners will have consistent support from buyers on large pullbacks.
Stock market winners are also companies that are on the cutting edge of innovation. These firms tend to run a very tight company, keeping costs in-line with revenue growth. The stock market winners are the firms that are often leading their sector in most categories, usually run by a management team that is experienced and cost-conscious.
The real key to avoiding investor mistakes, such as chasing past stock market winners, is to be aware of this bias. It is in our human nature to make these investor mistakes; but to be successful, one needs to be able to make sound logical decisions, even if the crowd is moving in the other direction.