Too many investors fall into the trap of buying high and selling low. How do you recognise the signs and avoid the same pitfalls?
Buying high and selling low is one of the most common mistake investors make; particularly those relatively new to the game. Perhaps this is because people like to feel loved. They like to feel popular, important, fashionable and part of what's "really going on" at the moment in the world of investing.
Maybe being invested in the flavour of the month fulfils that basic need. But investors also like to try and make money of course. And on that basis, following "hot" areas is a route to achieving exactly the opposite.
The motorway queue
The problem is particularly acute during bull markets like the one we've been in since the spring.
Metaphorically, you're sitting in a lane of traffic waiting for yours to start moving whilst everyone else seems to be speeding by, so you switch and maybe even move along a little before the inevitable happens and the lane you were in moves further and faster than you ever thought possible.
"Maybe it's not too late?" you think. After all, you "knew" that lane would have to start moving soon! So you switch back and move a little, but then the same thing happens again. On it goes...
Meanwhile, a driver you were previously adjacent to is now a mile ahead having stayed in the same lane, relaxing and listening to some music or chatting with his/her passengers (we'll call this person the "high-yield" motorist).
Shun the hotties
You only need to look at the busiest bulletin boards across the web of any small cap share with exciting prospects that is rising quickly on any given day.
Miners, tech stocks, oil explorers, small pharmaceuticals companies -- they all seem to have their day in the sun, bringing out all the people who "knew" this was going to happen, had bought in at much lower prices and are even thinking about topping up/ "pyramiding" and the like.
The truth is that the savviest are heading quietly for the door, or have already exited.
The boards generally are far busier during rising markets than falling ones; a contra-indicator if ever there was one. The best approach is to avoid the trendy, much-discussed shares whose shares have already started to rise quickly and about which there is a great deal of excitement -- and concentrate on individual value instead.
B.L.A.S.H and Baruch
Otherwise, what you'll tend to achieve in practice is the exact opposite of the BLASH ("Buy Low And Sell High") approach we should be taking -- or the, "happy to sit there, relax and reap the yield" approach of the high-yield investor.
As the legendary investor Bernard Baruch said: "Don't try to buy at the bottom and sell at the top. It can't be done except by liars." In other words he was content to buy at levels he perceived as good value and to sell after he had made a reasonable profit; all else being hot air.
By concentrating only on individual value, you take much of the fear and emotion out of the equation. You can't truly predict markets, but you can perceive genuine value. You'll miss the absolute peaks, but so what?
Many investors were sitting out of the market in the early part of this year given the dire economic picture the world was painting for itself. This was understandable; things did look very bleak indeed. The problem is that this was already in the price and then some.
Now, after an incredible bull-run, small investors are buying more shares, just at a time when the recovery and then some looks more than priced in to many companies' shares. It's ironic that investor confidence seems to follow market rather than work in a contrarian way -- but you don't have to follow the herd.
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