Why Most Investors Buy High And Sell Low

[savio13]

The old stock market saying “buy low and sell high” is the opposite of what most individual investors do. While investors obviously want to see increasing returns, most inadvertently end up “buying high and selling low” instead. This is largely the result of human psychology and our tendency of wanting to chase yesterday’s hot returns.

When most people see a stock continually going up, they think “buy.” On the other hand, when they see a stock going down, they think “sell.” Instead of thinking of the reasons why these stocks are going up or down or the fair value of the company, they mainly think of the trend of the stock. Also, most people want to invest in “hot” or “safe” stocks. If everyone else is investing in a stock, they figure, it must be a good buy! In reality, since everyone is investing in the stock, it is vastly overvalued. This is why it is so difficult to have stock market success for beginners, psychology plays against them!

The extreme cases of “buying high” result in asset bubbles. The most famous of asset bubbles is probably the Dutch tulip bubble,when people were mortgaging their homes and businesses to buy tulip bulbs in the hopes that someone else would pay a higher price for that tulip bulb. The most recent bubbles were the tech bubble of the late 90’s and our most recent housing bubble.

When stocks were at their March lows, many individual investors were panicked and sold out (or certainly did not put new funds in the market). The market has since recovered by about 8%. Since the market is still risky, it is likely that many investors won’t invest until the market goes up more and more, at which point, the market may well be due for another contraction.

Our emotions are not our friends when it comes to investing. Relying on emotions is a quick way to buy high and sell low. This is because people give into their greed when they see everyone else making money in a specific stock or asset class, and then they give into their fear when that stock or type of asset plummets from being overvalued.