Everyone knows that there are a number of timeless truths about the markets that have held up over the course of time. One of them, of course, is that "past performance is no guarantee of future performance." Yet how many mutual fund companies tout the performance of their top funds over the past 12 months or 2 years (or whatever time frame is most convenient for them)?
Another timeless truth is to "buy low, sell high." This seems so obvious as to be almost a truism, yet how many people muck this up? In search of momentum, investors tend to chase hot stocks, and end up buying high and selling low rather than buying low and selling high. This is also a common fallacy in the mainstream media. Check out this recent piece in the USA Today, in which John Waggoner encourages people to "follow the leader." Waggoner's thesis is that moving into hot sectors at exactly the right time can result in some stellar investment performance. The problem, of course, is with the phrase "at exactly the right time." Market-timing can be difficult at best, impossible at worst. And, as Waggoner concedes at the very end of his article, taxes, fees and other trading costs tend to erode any above-average gains from this strategy.
What have been your experiences in following the "hot hand" into new stocks and new sectors?
[image: Follow the Leader by CameraBaggs on Flickr]
