It requires more than skill to buy at the bottom of the market.
OK, let's be straight here. I obviously don't know whether you personally are beating or lagging the market. But with a great many professional money managers failing to keep up with the market, it's not much of a leap to assume that plenty of individual investors have found themselves eating Mr. Market's dust, particularly during the crazy rally over the past eight months.
For those of you scratching your heads and wondering why you can't seem to figure out the crazy stock market, an article from CNBC yesterday might go a long way toward elucidating the situation. The thesis of the article was that investors who are still hesitant after the market's crash are slowly starting to creep back into the market:
Investment advisors say clients continue to view shares with hesitancy and scepticism -- a vestige of the panic that swept through the markets just a year ago. But that fear, ironically, has kept shares from going up too far, too fast -- allowing the market to move gradually higher as investors creep timidly back into the market.
And That Is The Problem
"Buy low and sell high" is the supposed mantra of most investors, but many individual investors find their emotions swinging more wildly than the bottom of the batting order at an under 8 cricket match.
When times are terrible and valuations are low, fear takes over and causes them to sell as fast as their mouse button can click. But when recovery hopes are high and everyone is feeling more bullish, these same investors find themselves willing to pay up for many of the same shares they sold in a panic months earlier.
Of course, it's not surprising in the least that that devilish imp Greed is goading investors right now. Looking at the returns of some shares, you'd think making money in the market was as easy as buying a cup of coffee.
These are truly exceptional returns, mostly because the drop-off was so steep. But there have been other short periods of exceptional returns, like these from the bottom of the last market crash…
Guts Required
In hindsight, March 2003 and March 2009 were exceptional times to buy shares. If you were lucky and skilful enough to buy the selected shares above, you'd likely be a very wealthy investor.
But it's not easy. Buying at the bottom of the market requires more than exceptional skill. It also requires guts, and plenty of them.
Right now, with the FTSE 100 having soared over 50% from the bottom, you probably want to keep a couple things in mind:
- Performance yesterday doesn't mean performance tomorrow. Just because a share has had a huge run doesn't mean that it's destined to keep going. In fact, it could mean that the company now carries a huge, unsustainable valuation. So instead of drooling over the shares that have taken off like an arrow, now may be the time to check out high-quality companies like Tesco (LSE: TSCO) that have trailed the market over the past eight months, but still stand to benefit from economic recovery.
- Avoid panic buying or selling. I hate to do it, but I have to break out this classic line from your mother: "What if everyone else jumped off a bridge? Would you do that, too?" Just because everyone else is buying or selling doesn't mean that you have to. When it comes to the stock market, things are rarely as bad as they seem in the worst of times, nor are they as good as they seem during the best of times.
More on the economy and the markets:
> If you're in the market for buying and selling shares, consider opening an online broker account with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here to find out how you can open an account for free today. There is no obligation to trade.
> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson.
