Steadfast FinancesKnowing When 'Not to Buy' is Just as Imporant as Knowing When to Buy

Knowing When ‘Not to Buy’ is Just as Imporant as Knowing When to Buy

Filed in Investing 101 , Investor Psychology 6 comments

If you’re curious why I take most investment advice and the majority of news/analysis from mainstream financial media with a grain of salt, this chart might answer your doubts.

(Note: Y axis is percent increase or decrease.)

At their peak, the mania driven belief in the bubble that these investments were ironclad, bulletproof, and would never depreciate in value was so ingrained into our brains that to say anything contradictory to those beliefs would have gotten you blacklisted from most major financial circles or never invited on financial TV to speak again. In essence, you would have been labeled as a naysayer, an idiot, or a bozo who just can’t accept the new paradigm of investing in the 21st century.

Of course, after these investment bubbles popped, and you were one of few outspoken individuals brave enough to criticize them, avoid them altogether, or be so bold as to short them, mainstream media quickly flipped their position and labeled you a genius and shower you with praise (e.g. Peter Schiff on The Daily Show).

Funny, how fickle the mob really is. (Yes, I swiped this line from Gladiator!)

Unfortunately, for the retail investors like you and I, many of us aren’t sharp enough to spot the warning signs of a bubble, and fail to realize the very simple fact that when XYZ investment appreciates several fold in just 1 or 2 years, that what they’re buying isn’t an investment… it’s a trade!

As I always say, sometimes the smartest move is to make no move at all, conserve your resources, and watch how the game plays out. Then, if the opportunity presents itself, the smartest and the most savvy of investors swoop in and buy all they want when no one else wants it or they’re getting it at a discounted price once the herd has moved on to the next big thing.

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Posted by CJ   @   23 February 2010 6 comments
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Feb 24, 2010
5:09 pm
#1 ctreit :

Doing nothing can be a good thing indeed. However, we face two challenges. (1) You may miss out on a lot of hot action for sometimes long periods of times. All these bubbles that you mentioned lasted for at least a couple years. In the tech bubble Amazon was silly at 400, it was more silly at 600, but the ones who did not think it was silly at 400 still made a 50% return at 600. (2) If everybody is doing it, if everybody is making a ton of money and you are not, you have a tremendous emotional and social hurdle to overcome. We humans are social beings; we want to be socially validated. When you snub your fellow traders, investors, friends, etc by not joining in the craze you are working against this human instinct.

Feb 24, 2010
5:31 pm
#2 Matt SF :

You bring up an important point: the greatest fear among many traders/money managers is they will not participate in the gains.

The layman would think that the number one fear money managers would have would be to lose money, but when polled, that’s not the case.

But the thing to remember, as someone whose made and lost money in bubbles, is that a well diversified portfolio allows you to sell into bubbles and buy more of what not bubbling (e.g. portfolio rebalancing) in the hopes that it will appreciate when sector rotation occurs.

Appreciate the comment – really good points!

Mar 2, 2010
2:15 pm

Dollar cost averaging helps make sure you are buying less when the market is up and more when it is down. It helps you invest consistently with out requiring perfect timing.

Perhaps that is a partial solution because it is just as easy to guess incorrectly whether your are trying to decide when to buy or when not to buy.

Mar 2, 2010
2:26 pm
#4 Matt SF :

Dollar cost averaging will certainly help, but I was more talking about retail investors thinking they will cash in on a quick buck jumping in way too late in the game.

One other thing that I do, that unfortunately doesn’t get enough mention in my opinion, is portfolio rebalancing where you sell some of your winners that exceed your set portfolio allocation percentage, and buy more of your losers.

For example, what would have happened had you sold your tech stocks on a quarterly basis during the tech bubble, and bought commodity stocks. Ten years later, those commodities would have done pretty well.

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