Selling low and buying high

Sometimes the stock market seems like a machine designed to produce regret.

When the market goes down, most people hang on until they reach a point of maximum pain and they sell. That’s when the market starts to climb back up again.

When the market goes back up, most people wait for the market to pull back (so they can “buy back in”). When the pull back doesn’t occur and the market continues to climb, they reach a point of maximum regret and buy back in. That’s when the market starts to tank again.

And so the story goes on and on over time. People end up buying at the top and selling at the bottom, en masse, because they invest using their psychological inclinations instead of their heads. That’s what allows calmer minds to make money over time.

The financial press is full of articles about those who sold at the bottom and are now regretting it and buying back in at the top. Why don’t people learn that trying to time the market doesn’t work?

This fear and regret cycle has repeated twice over the last 6 months. As the market tanked in October and November of last year, people sold at the bottom. As the market climbed out of those lows, the same people bought back in only to see the market tank again in March. Guess what happened from March to May? Rinse and repeat.

Why don’t people just accept that their psychological inclinations are almost always wrong when it comes to investing in the stock market? I don’t know. Tons of studies have shown that people make bad investing decisions using their psychological reactions. And yet they continue to do so.

The stock market will go up and down, I guarantee it. When it feels awful to hold on, you should be buying. When it feels wonderful because things are going up, you should be selling. Do almost the exact opposite of what you feel, and you’ll be a better, more successful investor.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Things are looking up

I’m not a market timer, but when market sentiment is as negative as it is now, it’s not a bad idea to look for the silver lining which may mean things are improving.

Today, new unemployment claims came in at over 500,000, the worst report since the brutal 1974 recession. After these figures are fully adjusted over the next several years, it would not surprise me to see this number close to 1,000,000.

How is that good news? Because the market is up today!

When extremely negative numbers come out about the economy and the stock market doesn’t go down by much or even goes up, it means people have fully grasped how negative things are and are starting to look for a future recovery.

That doesn’t mean the market has bottomed or that all the bad news has been announced. But, it does mean that market participants are recognizing how bad things are and are perhaps seeing that things won’t be so bad in the future.

Added to this, employment figures are a lagging indicator. That means that employment figures tend to look worst near stock market bottoms. Employment is a reaction to economic conditions, not a forecaster of them. Employment figures look bad when employers are throwing in the towel and laying people off. This is usually when the stock market begins to recover.

Why? Because the stock market is a forecasting mechanism. The price of a stock should be equal to all future cash flows. Prices shouldn’t reflect current conditions, or even conditions over the near term, but should reflect all future possibilities of a company.

That’s why the stock market tends to recover long before the economy, and why waiting for economic figures to improve is a sure fire way to miss out on huge market rallies.

I don’t know if the stock market will go up next week, month or year, but I do know that many companies are trading at depression levels even though they have bright futures.

In other words, the best bargains in 25 years can be found right now, if you can see the silver lining.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.