How Looking Backwards Can Lead to Worse Returns
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 | | How Looking Backwards Can Lead to Worse Returns |  | One of the great ironies of investing is that people know that it's forward looking. Past performance is no indicator of future returns.
Yet investors just can't seem to help buying into shares of companies on a hot streak. It could happen in any market, any sector, or any stock at a time.
But markets, assets, and stocks move in cycles. If you've bought what's already been a runaway winner, chances are you may be buying close to the finish line.
This is a fact that can work against you in two ways. Buying a company that's already had a great run can pose a problem.
But avoiding a company that's down and out can mean missing out on market-beating returns over the next few years as the market fears wane and any company-specific problems go by the wayside.
In the 1990's, tobacco stocks were stuck in a mire. So was Apple, which had to be bailed out by Microsoft before a resurgence that made Apple a bigger company than Microsoft.
Today, many companies have failed to match the overall stock market and get to new all-time highs, and there plenty of short and long-term opportunities as a result.
Understanding the fact that an oversold company is likely to drop, and that a popular company will likely have poor returns, reflects the propensity of traders to extrapolate current trends indefinitely.
But markets are cyclical. And getting out at the top of a cycle, and buying near the bottom of a cycle, is how to generate market-beating returns, time after time.
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