“Buy Low, Sell High”… Sounds so easy doesn’t it. For years I have heard this mantra repeated time and time again. Everyone has.
From beginner investors to the famous gurus, everyone knows this is the basic idea behind successful investing. So here’s the question…..if everybody knows this simple rule, why is it so hard to implement?
I would argue that psychology plays an enormous role in differentiating brilliant investors from the rest of the herd. Sir John Templeton expressed this best when he said, “To buy when others are despondently selling and sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
Having the opportunity to “buy low” is generally surrounded by some sort of negative circumstances. Superior investors are able to assess the environment surround a set of negative circumstances and determine there is value in purchasing a depressed asset. An example of this would be a real estate investor who purchases a suite of foreclosed homes back in 2008 and waited for the market to recover.
Most people have the tendency to buy when everyone else is buying and sell when everyone else is selling. This is not always the best approach when you have a desire to outperform the marketplace over time with reduced risk.
“From time to time we see rabid buyers or terrified sellers; urgency to get in or get out; overheated markets or ice-cold markets; and prices unsustainably high or ridiculously low.” – Howard Marks
By following the emotional tendencies of the marketplace, you are almost guaranteed to have less than stellar results. In order to succeed in the midst of emotional markets requires skepticism mixed with a balance of pessimism and optimism.
When you see a trend in an investment, you often should be a bit skeptical of the direction it is taking. If the asset seems to be valued higher than you would prefer to pay for it, then skepticism mixed with pessimism that others are buying for the wrong reasons. If the asset seems undervalued, then skepticism that people are making a wrong judgement would require a mix of optimism that you believe the price will recover.
Investment success requires being comfortable in the uncomfortable scenario that your investment decisions vary from popular opinion. This is what I call comfortably uncomfortable investing. In order to implement this concept in light of “buy low, sell high”, you have to buy when everyone else is selling (and the price is thus low) or you’re selling when everyone else is buying (and the price is high). This can be a very lonely strategy at times, but look at the Warren Buffetts of the world and you will see that it is often lonely at the top.
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