All investors sometimes make mistakes. Even top investors such as Warren Buffett get things wrong occasionally. However, there’s one mistake that private investors tend to make time and time again that often ends up leading to underperformance. That’s buying and selling stocks at exactly the wrong time.
We all know that buying low and selling high is the key to making a profit in the stock market. Yet in reality, so many private investors end up doing the opposite. Let me illustrate with an example.
Earlier this week, I received a text from an old friend, who I’ll point out, is a very intelligent guy and earns great money.
The text read something like this: “Hi Ed, I’m worried about my investments because the stock market is falling. Should I cancel my monthly investment subscription into my funds for now?”
I almost laughed when I read that text because it perfectly illustrates the classic behavioral finance mistake that so many investors make.
When markets were at record highs and investing felt good at the beginning of the year, my super-intelligent friend was more than happy to commit a proportion of his salary every month into his investment funds. Yet now that shares have fallen in price and are actually cheaper, he’s afraid to invest. Can you see the huge mistake here?
With stocks having fallen sharply in recent weeks, the market is now giving him the opportunity to ‘buy low’, yet he’s not interested. He was more interested in investing when stocks were trading at lofty valuations and near record highs. At a logical level, it doesn’t make any sense at all, yet it’s a mistake that so many people make due to the fact that humans simply hate racking up losses and panic when the market is falling.
Go against the herd
I totally understand that investing can feel challenging when stocks are falling. No matter how experienced you are in the investment world, looking at a screen of red is never pleasant.
However, if you can remain calm when others are panicking, and have the courage to take advantage of lower share prices when they’re on offer, you can be rewarded in the long run.
The key is to think differently to the herd and see lower prices as a good thing. To quote Warren Buffett: “If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
Buying low and selling high sounds easy but, in reality, it’s often not. All too often, private investors get sucked into buying at the top of the market and then don’t buy (or even worse – panic sell) when share prices drop. If you can avoid making this mistake, and buy when stock prices are lower, you’re likely to see good results over the long run.
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