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Apprenticed Investor: Don't Speak, Part 2

05/24/05 - 07:07 AM EDT

Barry Ritholtz

Last week, we reviewed five of the top 10 things investors say and do that ultimately undermine their investing success. This week, we continue the process. (For part 1 of the story, click here.)

If you have ever said -- or even thought -- any of the following, you need to re-examine your investing philosophy:

6. 'This stock looks cheap down here.'

Any time you hear this tidbit, you can bet that either 1) the stock just got killed because of some awful news, or 2) it's in the midst of a long and relentless downtrend.

Don't confuse stock price with value. This was especially true in 2001 after all the prior splits. Sun Microsystems SUNW is a perfect example. Monday's closing price of $3.89 may sound inexpensive, but don't forget the five splits between 1995 and 2000; back them out, and the stock is $124.48. Same $13.25 billion dollar cap, but it doesn't sound so cheap minus the splits.

Of course, some stocks do actually get cheap "down here." But it has nothing to do with the numerical price.

7. 'This fund did great last year.'

This is the flip side of "looks cheap down here." It comes up whenever someone is considering putting money into a mutual fund.

It is the investing kiss of death.

Studies have demonstrated that last year's hot fund is this year's loser. The prior year's performance is the single worst indicator of the next year's numbers.

Some funds did well because their niche was hot that year. It could be a region -- last year, it was energy, a few years before that, Russia. Sometimes a sector is the flavor of the month. Defense was recently the darling of the moment.

Funds that represent niches often outperform in some years and badly underperform in others, as the factors leading to their outperformance were aberrational and often unlikely to repeat. That's why chasing last year's news usually results in poor performance.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

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