AP Wall Street Trader

In the last 30 days, the Dow’s volatility increased significantly and took investors on quite a roller coaster ride.

As such, I’m hearing from a lot of people who wonder what to do next.

I’m going to answer some of the questions I’ve received in upcoming issues of Investor Brief, so stay tuned for that, but first I want to share some words of wisdom from two of the best investors I know (both are contributors to my Wall Street newsletter).

In my recent conversations with them both, I asked what mistakes they see individual investors making right now.

Misunderstanding Momentum

Bill Nygren is a true value investor. His flagship Oakmark Fund is up 37% so far this year, more than double the S&P 500 and in the top 4% of funds of its type. He told me he often sees investors do the opposite of what they should do:

“I think the biggest mistake, Maria, continues to be becoming too momentum-focused based on where things have gone recently. So we see investors redeem their mutual fund shares after periods of bad performance instead of using those bad performance periods to opportunistically add to asset classes that had become more attractive.

“I think that's by far the biggest mistake investors make. It's the one that's most costly to their long-term performance, and it's one of the easiest to fix because you can fix it just by doing portfolio rebalancing that mechanistically forces you to sell areas that have performed really well and move the capital into areas that have performed more poorly.”

Bill brings up a good point.

Through the years I’ve seen people oversell and then overbuy, usually because of an emotional overreaction to the news.

Discipline will always win out over emotion in the long run.

A Fundamental Disconnect

Dan Niles, as you may know, is a superb technology analyst and money manager. He’s Co-Chief Investment Officer at Alpha One Capital Partners, and he also thinks you need to look below the surface:

“I think the biggest mistake is confusing stock prices with fundamentals. And what do I mean by that? Well, there's this common misperception that stock prices discount in advance the economy.  

“I think the easiest way to show that's not true is the S&P 500 peaked in October of 2007. Think about how you were feeling then. Then fast forward just two months and you had the start of the worst recession most of us have seen in our lifetimes. So I think the biggest thing to kind of keep in mind is that just because stocks are going up does not necessarily mean that things are great.”

Even bad companies go up when the market’s on a tear.  So it’s important to look the fundamentals of a company. Here are seven specific questions I like to ask when researching a company.

After the perfect storm of a financial crisis, recession and bear market, it’s easy to make mistakes that at best slow down your portfolio’s recovery and at worst set you back even further. I hope hearing from top investors like Bill and Dan will help you settle on the right strategy.

Special thanks to both Bill Nygren and Dan Niles who are featured in the current issue of Wall Street (click here to learn more), in which we talk more about the economy, technology, and some of the stocks they especially like right now.

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• The Dow 30 in Real Time
• The CNBC Stock Blog
• Market Strategies: CNBC's Stock Blog
• Art Cashin: I'm Still Skeptical About Markets
• Last Year's Dogs Are This Year's Angels: Private Banker 
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