Why investors should always remember the story of Beanie Babies ... following the crowd could be following it off a cliff ... investing based on the numbers is always a better option
If you remember the 1990s, you probably remember Beanie Babies. And if you are a smart investor, you remember what a small toy can teach us about crowd-seeking.
For those who don't remember, Beanie Babies were small stuffed animals with cute names that became collectible. Eventually, a $5 toy that was in mint condition and had its original tag could sell for thousands of dollars. Families sunk their entire savings into them, hoping that they would fund college educations or retirement plans.
And, of course, the bubble popped. Stuffed toys that had been worth thousands of dollars were suddenly worthless.
Blame went all over the place, but the real fault lies with how people invest.
Let me explain ...
Last week I wrote about recency-bias, or the tendency for investors to put too much emphasis on a stock's momentum. Stocks that have been going up will continue to go up and therefore are a buy. Stocks going down will continue to go down and should be sold. This reduces analysis to simply looking at a chart and making a decision based on a gut feeling.
This week, I want to continue with another investment mistake reflected in the toy example above.
Louis Navellier recently wrote a series of articles on these mistakes, and he got down to the basics to explain why investors make these mistakes over and over again.
Imagine you and your hunter/gatherer tribe are out and about ... moving to a place with more fresh water.
On your way, you see three dozen terrified members of your neighboring tribe running for their lives. It's a human stampede. Your instincts will tell you to run like the wind. Your instincts will say there's a good reason three dozen people are running for their lives. It doesn't matter if you can't see a saber-toothed tiger or a rival tribe with spears ... you just know it's time to run.
This reason -- survival -- is the core reason why humans find comfort in crowds. It's how we survived in the wild and became the dominant species on Earth. To this day, we know having your own crowd -- your family, friends, and coworkers -- leads to longer, better lives.
However, the desire to be part of a crowd can kill your stock portfolio. Going your own way can save it.
The Problem With Crowd-Seeking
Regular readers of the Digest are familiar with momentum investing. We're big fans of investing in trends that we think can transform our world, including marijuana, 5G and electric cars.
But we've never suggested following the crowd blindly. Louis explained it this way ...
The crowd-seeking I'm talking about -- follow the herd, think later -- is responsible for a lot of failed investments. It means you won't pick up on a shift in the trend. Thus, you'll get your timing all wrong. You'll often end up buying near the highs and selling near the lows.
With Crowd-Seeking Bias, even the best investing ideas can become a losing proposition.
The flip side is to be a contrarian. In other words, to buy the dip and sell the highs. As we've established, though, it goes against our instincts. That's why everyone isn't Warren Buffett. But you can get his level of returns (or better) by checking your emotions at the door -- and sticking with a pattern that works. Investors are better off looking for stocks with high value. Not just cheap stocks, but ones with solid fundamentals -- positive trends in sales, operating margins and earnings. When stocks like that experience a little downturn, it's not time to sell, but time to buy the dip!
The trick is finding those companies.
And, by the way, the opposite is true, too. When stocks going up start to experience lagging sales, decreasing margins and earnings misses, it's time to sell, regardless of what the crowd is doing.
Using numbers for decision making takes your biases out of the equation ... and that's how you achieve superior returns. Here is Louis again to sum up.
Operating margins, sales metrics, earnings projections ... it all sounds pretty boring, I know. That's exactly the point.
These factors don't activate your feelings. They do activate something much more important: the system behind my new Project Mastermind.
You can avoid the worst blunders most investors make, such as crowd-seeking, by using facts to make your investment decisions. Today your portfolio might be looking pretty good -- but the market is hitting record highs.
Don't let crowd-seeking blind you to the reality of your abilities and the circumstances around you. You can invest like I do by using Project Mastermind. Louis recently revealed his Project Mastermind system to the public, and the pick he gave away during the presentation is already up significantly.
You can learn more about it by clicking here.
Enjoy your weekend,
Luis Hernandez
Editor in Chief, InvestorPlace
P.S. The ultimate retirement "catch up" stocks ...
Louis Navellier's newest initiative -- Project Mastermind -- employs smart "predictive" technology to pinpoint the market's fastest-moving stocks with amazing accuracy.
Some of these fast-moving stocks can deliver huge gains in months ... and some in mere weeks.
Louis recently sat down for a rare interview and explained the full details behind Project Mastermind -- the nearly four decades of research that went into its development ...
And how it can help you "catch up" on retirement.
For a limited time, you can watch a replay of the interview here.
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