Chasing Performance – The Biggest Wealth Killer

Investing is the idea of buying a security or an asset, that on the basis of fundamental research, allows you to believe that in time the security or asset will be worth more than what you paid for it in the first place. The securities that we are buying are fractional shares of actual businesses, they are not just pieces of paper. Just like any business, the actual intrinsic value usually changes gradually over time. Yet because stocks change every business day, stock prices change each day and it is nearly impossible to tell why they move one way or the other in the short-term. The human brain is able to respond to a tremendous amount of stimuli. It is natural to look regularly at prices to see what you are “worth” at any given moment, but the problem with that mentality is that it will lead to bad decision making. Unless you are in need of funds within the next year or so, it is best to take a longer-term outlook in investments. This allows businesses to create value and for their stock prices to converge with intrinsic value. Think about how many different “crises” we have been through in the last 5 years that have disrupted markets. Ultimately when the volatility fades, it is the business values that matter.

So far in 2015, the best performing stocks have been the most expensive glamor stocks such as Facebook (FB), Amazon (AMZN) and Netflix (NFLX). These companies all trade at over 100 times real earnings and engage in very aggressive accounting tactics. That has not prevented them from moving up, but it does make them risky stocks because of the disconnect between price and intrinsic value. The companies will have to execute absolutely perfectly to warrant current valuations. Obviously funds overweight these types of stocks are going to be outperformers and they are heavy components in both the S&P 500 and the Nasdaq. In 2000 tech stocks were the rage and if you weren’t heavy in those sectors you underperformed, despite the fact that just about everybody knew they were drastically overvalued. From peak to trough, the Nasdaq dropped about 75% over the following 3 years. Chasing performance is a loser’s game and always have been.