Buy low, sell high.
Any idiot off the street could repeat this phrase to you as if they had the secret recipe for investing success. Honestly, it’s good advice. One of my favorite investing quotes, and one I try to base my investing strategy around comes from the great Warren Buffet. He famously said “Be greedy when others are fearful, and fearful when others are greedy.”
On the surface it seems like Buffett is saying the same thing a different way. But what I love about his quote is that it’s actually much deeper than simply buying low and selling high. His quote also illustrates why “buy low, sell high” is much easier said than done.
In the investing world, almost like no place else there is an amazing herd mentality. When things are going good, such as over the past month, all the talking heads will tell you how great of a time it is to buy! In 2009 at the height of the recession it was all doom and gloom. Analysts and pundits were more likely to tell you that the S&P had a better chance of hitting 0 than it did 1500.
“So what?” You might be asking. “The economy was terrible in 2009 and things are really looking good today, its common sense!”
Let’s take a look at what that advice looks like in picture form:
Following the herd mentality is one of the most common reasons individual investors fail. They jump in the market full throttle when everything is sunshine and rainbows like this past month, and they sell off or sit on the sidelines petrified with fear when true opportunity is staring them in the face.
Just last week Reuters wrote how “Investors pour a record $55 billion into US stock funds in January.” If investors were really trying to “buy low and sell high” would they really be going all-in on stocks when they’re at five-year highs? Doesn’t sound like good timing to me…
My point in all this is not to say that stocks are a bad investment right now, the market could well keep rising for another 2 years from this point. The point I want to drive home is that it’s of the utmost importance to block out all the noise and opinion where your investments are concerned.
Pundits and “experts” have a long history of being wrong. 21 of 35 ESPN “experts” picked the 49ers to win the Super Bowl. A certain political “expert” predicted a landslide win for Mitt Romney in the past election, and how can we forget all those ratings agencies that held AAA credit ratings on Lehman Brothers and AIG just weeks before their collapse.
Visit any online brokerage site to research an investment and you’ll find something similar to the picture at the left. Ratings and opinions from multiple sources which in theory are designed to help you make better investment decisions.
From my experience it’s extremely rare to find anything rated below a “hold”. The few times I’ve seen sell ratings on stocks is when the stock price had already suffered a dramatic drop. The ratings to the left are actually from MasterCard (NYSE:MA), which is currently trading just below its all-time highs.
If you had followed Warren Buffett’s advice you would have bucked the trend and put your money to work when things were looking bleak. If you relied on the media and analysts to tell you when to get back into the market, chances are you missed out on some great returns over the past couple of years. In other words, you were the “others”.
The past recession was one of the worst ever. They said the world was ending. Yet here we are, standing safely on the other side. Know that no matter what, there will be more recessions, panics and bubbles in the future. How we react to them is entirely up to us.
When the next one comes along will you buy into the doom and gloom, selling on the way down. Only to buy back in once the recovery is in full swing? Or will you keep your long-term focus, and realize that short-term turbulence creates the opportunity for great long-term gains?
Enjoy the current bull market, but remember to stick to your asset allocation and stay focused on long-term goals. You shouldn’t stick all your cash into the market now any more than you should have taken it all out in 2009.
Are you able to stray from the herd and invest when times are tough?
Do you find yourself being swayed by analysts ratings when looking to invest?
What are some of your favorite investing quotes or mantras?