Stocks with big gains are the ones most likely to make more money. You can spot them, but what happens next?
Eventually all stocks and markets peak. Everybody expects it but how it's handled is one of the most interesting aspects of investing. Not because of the market, but because of investor psychology.
Let's take a look at an example of a stock that is well known amongst those who work behind the scenes in technology. F5 Networks FFIV has been a leading tech. stock for many years but the stock's price path may seem surprising.
You can see the stock has been range bound for many years peaking in late 2010. The money in the stock was from the big run at the beginning of the bull market in the spring of 2009 until the end of 2010. It was a healthy gain at nearly 7.5 times. Since then the stock has gone through cycles of losing nearly 50% and making a full recovery to near the $150/share high. It is currently down nearly 20% from the high.
Why it matters
The key to successful investing, especially in the stock market, is to concentrate capital in the top performers. It is the number one indicator with an over 90% reliability measure (while stocks are trending higher). For this reason investors gravitate to big winners like FFIV in 2010. But the challenge is to avoid the conditioning of past performance when the stock or market is no longer working.
The analysis of FFIV matters at this time as some of the current market's best stocks are extended by historical measures. NVDA and ADBE are two examples. Since early 2016, they look like FFIV through 2009-2010. Can they go higher? Sure, but how much upside can there be?
One of the most useful tools for predicting the stock market is historical precedence. As highlighted earlier relative performance is a remarkably useful tool for future performance. But eventually the big run in every stock and every bull market comes to an end. How will you handle it?
Big winner still lingers