The fallacy of returns

The Fallacy of Returns

Many investors fall into the trap of buying stocks simply because prices have risen or fallen, ignoring the crucial role of company fundamentals. Stock prices fluctuate based on countless factors unrelated to earnings or equity growth. Consequently, volatility can make investments look successful or disastrous largely by chance. A poor investment might yield positive capital gains, while a sound one could result in losses.

This is arguably one of the biggest pitfalls, for me included; taking profits or mitigating losses while forgetting that the company that doubled in market cap also increased its earnings and positioned itself for continuous growth. Thus, selling or buying a company to secure gains or mitigate losses is a mistake, as this ignores business and market fundamentals.

Finally, it is not always right to be a contrarian; the stupidity of the market might actually be correct. What matters is not volatility, market sentiment, or when a stock has been purchased.