Why People Buy High and Sell Low

Buy low, sell high. The oldest mantra in investing. Simple enough, right? Not quite.

Time and time again, we see the opposite. In the late 90s, everyone rushed in to buy tech stocks as they grew more and more expense, only selling when prices began crashing. You saw the same with real estate in 2006 and then again with Bitcoin in 2017.

Buy high, sell low. Rinse, repeat. But why?

Well, Everyone's Doing It

Groupthink is prevalent everywhere, investing is no exception. When people jump on a bandwagon, whether it's Yeezys or Beyond Meat, the momentum seems unstoppable. With popularity exploding, frenzy ensues and common sense takes a backseat. Whatever the price, you're willing and eager to pay.

"Everyone else is doing it, so it must be good".

The good times don't last forever. Eventually a tipping point is reached. Valuations get so outrageous, people sober up. Panic follows, prices crash and you sell with the crowd.

FOMO

FOMO, the fear of missing out is a close cousin to groupthink. We all have a tendency to compare ourselves to our peers. When we see our friends make a fortune with Telsa, we naturally want some of that action. Jealously often leads to irrational behaviour such as chasing gains that have already happened.

Playing catch-up is rarely a good strategy. When gains are large enough to pique your interest, it's already too late. The upside has been captured.

Get Me Out

Studies show the pain of loss is twice as impactful as the joy of gain. Meaning our tendency to avoid loss outweighs our desire to profit. This makes it really hard not to bail during downturns. When we see red in our account, we want to stop the bleeding. As a result we sell low, when we could be buying low.

How Do I Avoid This?

Have a plan and stick to it. Don't get caught up in what your friends are doing, the latest trends or headlines. Ignore the noise and play your own game.

Stocks tend to go up over time. As long as you have a well-diversified portfolio and are thinking long term, over time you'll be buying low and selling high.

Comments

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