Thursday, March 20, 2008

Don’t Chase Investment Performance

As my own investment rule, I don’t chase performance. I learned my lesson in the “dot com” bubble. Frequently, investors jump on the hot investments only to later realize they bought at the top. Commodities are a recent example.

On March 5, 2009 a friend wrote:

“I was thinking that some hedge funds … may start to sell positions that have big gains to offset mortgage-related losses - the big gains coming from commodities. I then read in Barron’s that some did not think this would happen because the commodity trade has been strong, will continue, etc. With the gains that wheat, corn, etc have been making, it seems like a good time for them to exit. And, nothing goes up forever. It seems to me that many commodities are in a short-term bubble and if hedge funds start selling, the drop could be severe, but possibly short.”
I replied:
“I definitely wouldn't short any commodities. I considered (for about 1 minute) buying some commodities since they've been on fire but they seem to be priced too high for me. These sort of "bubbles" seem to last longer than they should, however.”
Over the last couple of days we have seen a sharp fall in commodities. Check out Bespoke’s Commodity Snapshot to see how far commodities have fallen in just a few days. The goal is to buy low and sell high. Don’t be tempted to “follow the herd” and pursue the latest hot investment trends.

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