During a rapidly rising market you might see your own investment results climbing, perhaps significantly higher than the overall market. During these times, it might be easy to delude yourself into thinking that you have some special talents or know more than the market. While this could be true, many investors do not tend to remember past mistakes or having underperformed the markets during past periods.
By not evaluating past mistakes, they may commit the same ones again. Current stock holdings might have above-average risk and be prone to similar problems to those of the past holdings. Maybe the companies are benefiting from some short-term industry tailwind or the stocks have “momentum” and are being bid up at increasingly high prices that are not justified by the fundamentals.
It is crucial during good times to evaluate past mistakes and frame these against your current holdings. Are there similarities? Did your past mistakes have too much debt? Were they commodity driven? Was management dishonest? What did you not see then that, if known, would have protected you from the eventual losses?
Don’t become complacent with recent results buoying investor sentiment. Now is the time to protect some of your gains and, if it makes sense, shift out of the riskier stocks you may now own. Look at valuations and earnings quality, the competitive strengths and weaknesses of the business and its ability to withstand adverse economic conditions, and understand the primary risks facing the company.
The stock market has a way of humbling egos. As Warren Buffett has said, you're not right because the market says you're right, you're right because your reasoning and analysis are correct.
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