Many investors attempt to "beat the market". As a result, they can end up buying companies they don’t fully understand, and overweighting companies which are going up the most. Valeant is a perfect example, it was very widely owned in the first half of the year and was easily one of the TSX’s top performing stocks - naturally, investors chased it for performance. Now, those who own Valeant are in a world of pain. Rather than aimlessly chase performance, we only own companies we know and understand.
In a previous blog post, 'Royal Bank is no longer Canada's largest company' (July 24, 2015), we noted Valeant's rise to number one in Canada. As Munger states in this linked article, some of Valeant's operating standards seemed "deeply immoral," which usually cannot sustain the longterm - consequently, the company's time on top was brief. The chart below illustrates the drastic plunge in Valeant stock.
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