Don’t Make This Investing Mistake

We all make mistakes every day. It is a part of life. But for many of us, making an error in judgment with our investments can be one of the most galling and frustrating mistakes of them all.

We tend to make some of the most egregious investing mistakes at the end of the year when we are not as focused as we should be on our portfolios and our stocks. Considering that the majority of stock gains tend to be generated from late November though the early part of the following year, if you do not scrutinize stocks during that time, you may not recover for some time. That is why it is paramount that you pay attention to what is happening with your stocks and others, or you will regret making this oversight many times in later months.

At year-end, the financial pundits talk a great deal about “the market,” what the market is doing, how it will finish the year, and the direction it could go next year, etc.  Folks, this is a trap. With the exception of index funds and ETFs, for the most part you are probably investing directly in stocks. As you know quite well, oftentimes there is no correlation between the moves in the stock market and the direction of individual stocks. For example, many people are worried that the stock market is too pricey, or overvalued, or has moved too far too fast. While that may be true, there are a whole host of stocks that do not carry these characteristics.  And investing directly in stocks based on one’s approach to the market can be lethal, since there can be little correlative effect.

This is the time to really perform due diligence and be extra selective.  Seek out stocks that are trading with rising daily moving averages, and are above their 20-day and 50-day averages. More important, you should almost exclusively invest in companies that are expected to generate big increases in EPS from this year to next year. Many of them are actually still trading at P/E multiples below their historical averages and have been overlooked while the herd goes from one stock du jour to the next.

People believe that a new year means a fresh start.  For the stock world, investors are more willing to invest in and give the benefit of the doubt to turnaround stories, like the Delia’s (NASDAQ – DLIA) story we recently profiled. Although a turnaround story may not materially change from December to January, given that it is a different year investors are inclined to believe in the underdog and begin accumulating it early. This is one of the reasons why The Dogs of The Dow theory tends to work like clockwork each year. Unfortunately, there is no comparable in the small-cap world.

In the absence of a real comparable strategy, avoiding high-flyers that will be sold off for profits at year-end and using the proceeds to invest in EPS growers or turnaround stories are likely the best plays for retail investors. Conversely, story stocks, unless related to the holiday season, tend to be laggards rather than outperformers. In any event, diligence is the key for year-end investing, lest you miss out on what is usually the most profitable time of the year.

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