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

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark. Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Starting Really Really Small

On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread. The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can. To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do. Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.

Herman Ye

Search