One of the commonest mistakes that investors make is basing an investment decision on a company's past performance or current share price. It's a mistake we in the investment community refer to as 'price anchoring', whereby investors let irrelevant information dictate their investment decisions.
For instance, they could see that a company is trading near an all-time-high price and establish that it would be silly to invest, assuming that the shares can climb no higher and only recognising the downside risks. After all, what goes up must come down, right?
Wrong when it comes to investing at least – Isaac Newton was spot-on when it came to apples. While it is obviously important to determine whether a company has become overpriced, being overpriced and trading at a record high are two completely different things! Sure, it would have been nice to have bought in at an earlier date before the shares rallied (retrospect can haunt you like that) but sometimes you simply have to pay up for quality businesses.
Just ask those investors who turned their back on Apple Inc. (NASDAQ: AAPL) when the shares had doubled in price to hit $14. They have since risen a whopping 3,639% to close overnight at US$523.47 a share and could certainly climb higher from there.
What should you do?
It is important to remember that when you buy shares, you are not simply buying a three-lettered ticker symbol. You are actually buying a portion of a company that you believe will be much larger and much stronger five or 10 (or more) years down the track, hoping to take advantage of their growth and any dividends paid along the way.
Village Roadshow Limited (ASX: VRL), Collection House Limited (ASX: CLH) and Amcor Limited (ASX: AMC) are all perfect examples of this. They are all currently trading around multi-year highs but have plenty of growth ahead of them.
Village, for instance, will explore the possibility of making a push into Asia with its theme parks while debt collection group Collection House continues to deliver solid growth in its revenues and collections of outstanding debts. Likewise, Amcor will continue to expand as it focuses on operations in emerging economies following its demerger from Orora Ltd (ASX: ORA) last year.
Foolish takeaway
Choosing to wait on the sidelines for a company's shares to fall in value could prove to be destructive to your overall wealth. Sure, they could fall in the short-term but if you believe in the company's prospects, the longer-term will surely be much brighter.
