Whether it's a stock or mutual fund, one of the worst (but most common) ways to size up an investment's potential is by looking at past returns.

A stock that's gone up a lot in recent years doesn't say anything about where it might go over the next few years. In fact, investments that have done exceptionally well in the recent past should be a red flag, as they have a higher likelihood of being overhyped and overvalued.

You should buy stocks that:

• You understand.
• Have a competitive advantage.
• Sell for attractive valuations.

Past performance should have nothing to do with the decision.