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The Secret To Beating The Market – Chase Price Not Peformance
Here is amazing fact. Peter Lynch the legendary head of the Magellan fund made 35% per year running money during his tenure, yet most of the retail clients of Fidelity lost money despite his amazing record. Why? Because most human beings are inveterate performance chasers. They buy when money managers are hot and sell when they are cold effectively destroying any chance of building wealth in the long run.
Ironically enough most traders do the opposite. They double up on buys that have cratered and add compulsively to shorts that are running away from them. A UK publication recently asked me “What is the most important lesson you have learned as a trader?” Buy high and sell higher. Sell low and sell lower. I answered. Yet most traders will never do that.
This, I believe is the primary reason why making money in the market is so hard. To succeed we need to hold two diametrically opposite ideas in our head. As investors we have to dollar cost average into our managed funds accounts. As traders we need to buy strength and sell weakness and quickly get out if the trend turns. In short, we need to learn to chase price, not performance. Yet whether we are a 5000 dollar retail piker or a 50 Billion dollar pension fund we all continue to make the same mistake.
Understanding this one simple irony about the human condition will go a long way towards making all of us much smarter market participants.