Thursday, November 10, 2016
How Investing Is Different Than Picking A Car
I'll take this one step further and say that fundamentals aside, past winners are often the most likely to be future losers in the investing landscape (and vice versa). Winners become more expensive as the trade becomes more crowded while losers become less expensive and sentiment collapses as investors leave. This major psychological discrepancy makes investing different than almost everything else you encounter on a day to day basis.
To provide a real world example, investors often look at the last 3 or 5 year performance when selecting a mutual fund for their 401k. Ironically, picking the recent winners is more likely to lead to near term losses.