“The reason people buy high, besides the fact that they are investing on emotion, is because they don’t know how to value a business.” Tom Vilord
The exact same events can be interpreted differently by investors.
Stock prices fluctuate based on many factors: world events, the Treasury bond interest rate, a company’s growth earnings, the perceived risk of a stock, inflation, the economic strength of the market, and so on. The price of a stock at any given time is based on the supply and demand driven by emotions at that specific moment in the market.
Most investors buy high and expect to sell higher. “I think the reason people buy high, besides the fact that they are investing on emotion, is because they don’t know how to value a business,” says Tom Vilord, president and CEO of Wall Street Value, an investor consulting and education company. “It’s as simple as that.”
In contrast, to buy low and sell high, here are five rules, according to Value Walk:
- Buy Stocks That Are Out-of-Favor – One way to find a company trading at a terrific value is to select a stock that is out-of-favor – meaning that people are selling the stock for a reason. If a stock is low, it’s low because people don’t like it. Whether the stock is down due to macroeconomic events, industry specific downturns, or company disasters, the majority of investors will want to steer clear. The uglier a company’s future looks, the cheaper the stock will be.
- Sell Stocks That Are In-Favor – Typically, in-favor stocks are expensive. If investors are excited about the prospects of a particular company, they will pay more to own it. This is precisely the time when a stock should be sold, not bought. The brighter a company’s future appears to be, the more someone will be willing to pay you for the stock.
- Ignore Sell-Side Analysts – A sell-side analyst is a professional money manager who analyses a stock for the purpose of selling a report of his or her analysis. The problem with sell-side analysis is that there are some significant career risks which influence an analyst’s opinion. The first risk has to do with an analyst’s fear of being different. This results in most sell-side analysts playing it safe and making most sell recommendations when a stock is widely disliked and already low.
- Overcome Your Emotional Instincts – Your biggest enemy as an individual investor is yourself. Investing does not come naturally to humans. Our emotional instincts make us panic at the first sign of danger and become euphoric as circumstances improve. Following these instincts causes people to make terrible investment decisions and ultimately to buy and sell at the wrong times. When stocks are at all-time highs, we become excited and buy because everything is great. When stocks are falling, we panic and sell because there’s no saying how far prices will go. Investors who can overcome these deep-rooted emotions will ultimately outperform everyone else who simply follows the herd.
- Base Decisions on Fundamental Data – Using current and historical financial statements to calculate a company’s value prevents overly optimistic or pessimistic analysis. Actual data removes any sense of emotion and uncertainty when evaluating an investment.
When it comes to investing, emotions are best ignored. Fear, greed and other emotional signals from the amygdala part of your brain, can easily derail even the best-laid investing plans.
Emotional investing occurs when investors make reactionary decisions about their assets based on a feeling of how the market is performing rather than on the company’s fundamentals and how the market is likely to perform long term, says Zack Shepard, vice president of Matson Money in Scottsdale, Arizona.
Individual investors who buy low and sell high in the stock market often do well in the stock markets. Thus, it’s important to ignore past price levels. Failing to do so will cause anchoring bias. Investors often determine whether a stock is high or low based on what the price was in the past, instead of a company’s fundamental.
Having a plan, even if you don’t follow the plan, is better than having no plan at all. Peter Thiel
References:
- https://www.valuewalk.com/5-rules-to-buy-low-and-sell-high-in-the-stock-market/
- https://money.usnews.com/investing/cryptocurrency/articles/2017-12-13/heres-why-some-investors-buy-high-and-sell-low
- https://www.wealthsimple.com/en-ca/learn/buy-low-sell-high