Top Investing Mistakes – Investing Based on Past Trend and Performance With Confidence

Have you ever looked at a historical chart and determined with absolute assertion that there is a certain pattern to a particular stock?  I certainly have.  Here’s the scoop, you can never assume that history will repeat itself even if there is evidence strong enough to suggest that such a pattern exists.  It becomes especially dangerous if an investor becomes  so convinced that he or she ignores the other supporting data suggesting the opposite.

Take a look at the below example of ProShares UltraShort Financials, or SKF.

As you can see from the above chart, SKF has been a money machine for many aggressive investors who took advantage of the financial crisis and the market’s volatility.  Looking at the historical chart, one could have argued that SKF has very strong support levels around $90-$100 per share.  This chart certainly suggests that you have a good chance of making big money if you just invest in this ETF once SKF hits this “hot zone”.

The reality: one can never be certain that the history will repeat itself, and it is absolutely dangerous to be so fixated to the historical patterns that it impacts one’s ability to make fact driven decisions. 

Now look at the current chart of SKF and its price.  Something clearly changed.  In SKF’s case, the financials rallied so significantly since its March 2009 lows that this double short financial ETF tanked from $200+ to now slightly above $40 per share.  For the investors who bought this ETF at $100 per share with the excitement and conviction that SKF will double again in a month, I hope they were able to make the rational decision to accept the loss and sell them before getting down to its recent 52 week low.

The bottom line: when making investing decisions, don’t make them simply based on past trends and performances.  There’s a saying in the financial world – “Yesterday’s winners are today’s losers.” Look at the different supporting facts appropriate for the particular stock and make a logical, unemotional trades that lead to winning plays.