Buy High and sell low - Don’t follow the crowd
Whether it’s a fund, a stock, a cryptocurrency, foreign currency, derivatives, or any other financial investment, including a diversified balanced portfolio, the goal is to buy low and sell high. Following Warren Buffet’s two rules of investing – Rule Number 1: Never lose money, and Rule Number 2: Never forget rule number 1. If you don’t sell at a price for lower than you have bought, you are sure to be a profitable investor. Sounds like an easy-to-understand logic. However, when investors look at their statement or market value and it is lower than the statement before or the last time they have looked, many draw the conclusion that they are losing money. That is incorrect. Then they start paying more attention to it, check their temporary balance more often and start listening to media which is almost exclusively referring to day traders only. Who would watch CNBC if all they would say is: “Dear Investor, markets will do what they have always done, which is eventually go up more than they go down. Rebalance and stick to your plan.” That would be responsible but not enough to run a financial channel 24 hours. I like CNBC, but I’m very interested and active with individual stocks, options and futures with my personal assets. There is absolute zero information and relevance to investors with a Balanced Diversified Portfolio. That applies to all financial media. For investors it is worthwhile understanding market psychology, behavioral finance, and the driving force behind the rookie mistake of buying high and selling low. After the declining balance created concern and the media induced fear, many feel an urgency to act. While the emotional part of that urgency is understandable, the fact is that most of these actions are caring the overwhelming amount of responsibility for people losing money in the markets. We always hear about market manipulations, politicians making poor decisions, insider trading and other things people blame for their losses. These things are certainly real, but all they create are market swings. Investors are mostly their own enemy and losses come from reactions to these swings. I always read that some people think that Warren Buffett has become such a successful investor because he has so much influence and tremendous purchasing power. While that is true, it’s not the reason for his success. He has always followed his philosophy of buying while others panicked and selling while others are at peak optimism. Recent years have brought waves of retail investors into the stock market through platforms such as Robinhood, as well as into the cryptocurrency market. Investing in the stock market and cryptocurrency market has never been easier. Anyone with a bank account can now invest hundreds or thousands of dollars at the click of a button from their phone or other digital device. While technological innovations have brought great value, opportunity, equity and wealth to millions across the globe, it has also changed the overall behavior of the stock market. We as humans are social animals, and it is easy to find solace in crowds. Our ancestors were social beings who lived in tribes to have a much larger chance of survival. Times have changed but the structure of our brains has primarily remained the same. We still crave the safety of the tribe (crowd). So, when we see our fellow investors, all doing the same thing—all buying the same stock or selling it, it’s an emotional decision, not a logical one.
While investing in the stock market or cryptocurrency market can come with incredible highs, both literally and figuratively, it can also come with devastating lows. But ideally this should be restricted to day trading, swing trading, cryptocurrency trading and trading with leverage. Anyone with a well balanced diversified and properly managed portfolio should be excluded. But reality shows otherwise. Every time we experience crisis in the financial markets, which consistently happens, many investors are drawn into making fear driven decisions. Driven by herd mentality and the media, these decisions are very often destructive to your overall plan which should be growing your assets. Taking assets away in a down market and deprive them from taking part in the recovery which always happens is counterproductive to that plan.
Key Takeaways
Most Investors buy high and sell low and that’s why most Investors lose money at some point. Emotions such as greed and fear, as well as investor psychology, prompt investors to make bad financial decisions.
There is no safety in crowds. During major events like 2008 and 2020, many investors withdrew money after the market crashed missed out on tremendous rallies.
When a crisis occurs, most stocks and bonds are trading at a significant discount to their intrinsic value due to maximum pessimism in the markets. Successful investors like Buffett, advise to add to their positions. In a balanced diversified portfolio that can be accomplished by rebalancing.
