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It is unfortunate but true that many
people are not particularly successful
investors.
Why? Part of the reason can
be explained in these words: fear and
greed.
How do these two emotions
keep investors from making progress
toward their goals? We can start with
greed.
Too many people are
mesmerized by hot stocks, those stocks
whose prices have risen substantially,
often in a relatively short period of
time. Instead of being satisfied with
their gains, however, investors hang on
to their shares, hoping they can wring
more and more profits from ever-rising
prices. But sometimes, rising stock
prices are not indicative of
high-quality stocks. For proof, just
look back a few years to the late 1990s
when investors poured huge amounts of
money into high-tech and dot.com
companies, many of which had little to
offer apart from futuristic names and
fanciful business plans. For a while,
the stock prices of these companies just
kept rising. But in early 2000, the
technology bubble burst, helping usher
in a lengthy bear market.
Now, we can switch to the
other emotion that can harm investors:
fear. Above all else, investors fear
losing money. No surprise there. This
fear often causes them to sell their
stocks when the price has fallen, so
that they can cut their losses.
In short, too many investors
hear "buy low and sell high" and then do
just the opposite.
To avoid buying high and
selling low, it would be helpful to know
when a stock is going to reach its peak
or valley. But no one can really predict
these things, and it is usually a bad
idea to try to time your sales based on
when you think a high or low is near.
Your investment professional
can help you ask the right questions
about why a stock is moving up or down.
For example, is a stock rising due to
hype, as was largely the case with the
technology stocks of the late 1990s? Is
its price/earnings ratio (stock price
divided by earnings per share)
unsustainably high? Or has its price
gone up so long that some type of
correction is perhaps inevitable? If any
of these things are true, you might want
to start thinking about the "sell high"
part of the equation.
On the other end of the
spectrum, you want to know why a stock's
price is falling before you bail out.
Are its products or services losing
their luster? Does the company belong to
an industry in decline? Is it
experiencing disappointing earnings? Or
is it merely the victim of a bear
market, which tends to drag down most
stocks, even the high-quality ones?
If this is the case – in
other words, if you are considering a
high-quality stock whose price has
fallen due to a down market or a
recession – you might want to buy more
shares, not sell the ones you have.
Warren Buffet, perhaps the most famous
investor in the world, has made a
fortune buying out-of-favor stocks at
favorable prices. Even if you never
achieve Buffet-like status, you can
improve your chances of investment
success by purchasing good stocks at
good prices.
Fear and greed. Buy low and
sell high. These are succinct phrases,
but they say a lot about investing. Give
them some thought. |
