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Finding the next big winners is one thing, but handling them is something altogether different. Most investors, “trained” by the prior bear market, tend to make three big mistakes:
First, they miss the new leaders because all their attention is focused on the old winners.
Second, they don’t realize that, at the start of a new bull market, leaders are shot out of a cannon, and often don’t come back. Thus, it’s best to pay up and not wait for a 10% or 15% correction, especially if these leaders have recently soared on a bullish earnings report.
Third, they often sell these leaders way too early, conditioned by the punishing bear market to take profits quickly. While volatility is usually high when the new leaders first come off the launching pad, the fact is, many can double or more during the first couple of months of a new bull market.
eResearch (ERES) is an example worth studying. Back in 2003, the stock actually broke out to new highs ahead of our buy signal, never pulled back (we bought on April 30) past its 50-day moving average, and rose 60% in just over two months. When it finally broke below its 50-day moving average in November, the stock was up 160% from our purchase price.
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