Every investor should know the phrase “buy low and sell high”. What that means is that it is best to buy stocks when they are at a low price and to sell them at a higher price. Buying low and selling high is how you make money in the stock market. Why is it then that there is such a temptation to do just the opposite: buy high and sell low?
Why is it so much easier to buy high and sell low? Stocks are different from other everyday things. When you go shopping for clothes or electronics or any other ordinary item and you see something that is on sale, you are more apt to buy it. A sale is a good thing for most merchandise. If a jacket was $100.00 yesterday and $80.00 today, it is still the same jacket but now you getting it for $20.00 less and are more apt to buy it.
Many people who buy stocks seem to have a different mentality. When the stock market is on the rise and stocks keep going up, investors have the tendency to want to jump in so as to not miss the boat. When a stock was $50 last month and $60.00 now, many investors are actually more inclined to buy at the higher price for fear of missing out. Even though the stock is more expensive now than it was a month ago, some investors can’t wait to buy at that higher price!
Conversely, a stock that is going down is actually on sale from the price it was a month ago. It is like the jacket that you were more inclined to buy and yet most investors find it more difficult to buy that stock at the “on sale” price. They fear that because the stock is lower and continuing to go down, the value of the company must be lower. Sometimes that is correct and sometimes it is not. With the herd mentality though, many investors get swept up in doing what everyone else is doing; buying when the stock is high. Then when it goes down, they panic and sell when it is low. Stocks for beginners is a hard mental battle in down markets.
This year has been a very difficult year for investors so far. I am tired of looking at my stocks every day seemingly just to see how much I have lost. Then, everytime the market does go up, it seems to go right back down again very quickly. Is now the time we shoud be buying? In my experience, every time the stock market has dropped a significant amount, as it has in the last six or seven months, if I would have bought my stock picks at the reduced prices, I would have made money. Unfortunately I am like most other people and have found that buying stocks in a down market is a very difficult thing to do.