Investing: Where Fools Rush In

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The five-year psychological cycle suggests a contrarian strategy: take a hard look at buying what has performed poorly in recent years. The answer today looks to be, as a group, large-capitalization U.S. stocks. The top 10 U.S. firms by market cap as of March 2000 have seen their stocks decline 27% on average through September 2006, while their combined net income has nearly doubled. The market has wrung out most of the 1990s excesses.

Moving money from sector to sector to capture performance is like frequently changing lanes on a crowded highway: you rarely get where you're going faster, and you risk a wreck. Recognize that strong recent performance often signals an investment opportunity that has passed. It's best to heed Alexander Pope's admonishment: "Fools rush in where angels fear to tread."

Mauboussin, chief investment strategist at Legg Mason Capital Management, wrote More Than You Know: Finding Financial Wisdom in Unconventional Places