Remember when Peter Lynch warned us in his book “One Up On Wall Street” that mom and pop investors get into big trouble when they buy stock in familiar names at a cyclical high? The specific example he gave was Ford Motor (F), which is the type of household name that catches the attention of new stock market participants after they’re no longer scared by the previous recession. These people start to see some of their friends buy new cars, and they catch snippets on CNBC about the market hitting new highs. They want in on the action. And so they buy the stock.
Within a year or three, the business cycle turns, earnings fall, and the stock price gets hammered as it shifts from selling at a premium to selling at a discount. It’s a very seductive type of business mistake for people that have generally sunny and optimistic … Read the rest of this article!