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This article originally published in fool.co.uk on 13/01/2012. I'm sharing this because most of us experienced the similar situation in 2011.
Looking back over the last roller-coaster year, did you fall into the trap of buying high and selling low?
It's easy to talk about avoiding buying high and selling low, but how do you make it happen in reality?
It is said that the bear argument always sounds the most intelligent. And it does. It's usually notable by its absence just at the point where the market is near its point of maximum complacency, as in early summer last year, for example.
You could have been forgiven for thinking the economic environment was perfectly benign. There was scarcely a gainsayer to be found and the FTSE would be 6,500-plus by the end of the year.
But from mid-July to, well, now -- the opposite is true. There are a few optimistic voices amid the gloom, but on the whole it's safest for commentators to point to the eurozone crisis as reasons to be cautious. Meanwhile, the average FTSE 100 P/E stands at less than 10.
My own way of coping with these fluctuations is to concentrate on fundamental value and invest accordingly. But it doesn't really matter what I think.
What do the greats say?
It does, however, matter what some of the world's best ever investors think. The trouble here is that you can easily find one to suit your own tastes. But we can't argue with the most successful investment pairing of all time – Warren Buffett and Charlie Munger.
And in the investing principles checklist from poor Charlie's Almanac, Buffett's "Abominable No Man" has some real gems of advice on this very subject. I would advise you to read it, but here are a few points directly relevant to helping us avoid the nervy investors' trap of buying high and selling low:
- Objectivity and rationality require independence of thought.
- Mimicking the herd invites regression to the mean (merely average performance).
- Determine value apart from price.
- Be a business analyst, not a market, macroeconomic or security analyst.
- Be fearful when others are greedy, and greedy when others are fearful.
- Guard against the effects of hubris (arrogance) and boredom.
And, as Buffett's mentor Benjamin Graham said: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."
And:
"The investor's chief problem, and even his worst enemy, is likely to be himself."
Easy -- so what's the problem?
This all sounds easy enough, doesn't it? So we can all resolve to follow these great investors' advice in investing for the long term, buying quality stocks during times when others are fearful and not allowing ourselves to over-trade in the process.
So here's the declaration of independence: "From this day forth, we will have the courage of our own convictions, listening carefully to rational, objective analysis, without necessarily following the herd."
The problem with this is the same as the overly ambitious New Year's resolution. We're setting ourselves up to fail.
It's very difficult to stick to the resolutions you've perhaps made on the back of Charlie Munger's advice when markets are very bad, very good -- or just plain boring! It's perhaps hardest of all in the good times when exciting stocks doing the rounds of the bulletin boards are zooming up by 20% a day, while your boring high-yield stalwarts are drifting in the wind.
But you simply have to live with this. You'll be glad you did when things turn sour and your quality stocks are still doing the business.
And by concentrating on individual value, you can take most of the emotion out of your decisions. At the same time, you want to avoid consensus opinion; positively shun it, in fact. That's what gets you into the mess in the first place.
To make this happen, you need to make yourself re-read your own short investing 'creed' before each investment decision. Also, an investing partner, or at least someone who can filter and challenge your decisions, can be an invaluable tool.
BY David Holding
http://www.fool.co.uk/news/investing/2012/01/13/how-to-stop-buying-high-and-selling-low.aspx
Looking back over the last roller-coaster year, did you fall into the trap of buying high and selling low?
It's easy to talk about avoiding buying high and selling low, but how do you make it happen in reality?
It is said that the bear argument always sounds the most intelligent. And it does. It's usually notable by its absence just at the point where the market is near its point of maximum complacency, as in early summer last year, for example.
You could have been forgiven for thinking the economic environment was perfectly benign. There was scarcely a gainsayer to be found and the FTSE would be 6,500-plus by the end of the year.
But from mid-July to, well, now -- the opposite is true. There are a few optimistic voices amid the gloom, but on the whole it's safest for commentators to point to the eurozone crisis as reasons to be cautious. Meanwhile, the average FTSE 100 P/E stands at less than 10.
My own way of coping with these fluctuations is to concentrate on fundamental value and invest accordingly. But it doesn't really matter what I think.
What do the greats say?
It does, however, matter what some of the world's best ever investors think. The trouble here is that you can easily find one to suit your own tastes. But we can't argue with the most successful investment pairing of all time – Warren Buffett and Charlie Munger.
And in the investing principles checklist from poor Charlie's Almanac, Buffett's "Abominable No Man" has some real gems of advice on this very subject. I would advise you to read it, but here are a few points directly relevant to helping us avoid the nervy investors' trap of buying high and selling low:
- Objectivity and rationality require independence of thought.
- Mimicking the herd invites regression to the mean (merely average performance).
- Determine value apart from price.
- Be a business analyst, not a market, macroeconomic or security analyst.
- Be fearful when others are greedy, and greedy when others are fearful.
- Guard against the effects of hubris (arrogance) and boredom.
And, as Buffett's mentor Benjamin Graham said: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."
And:
"The investor's chief problem, and even his worst enemy, is likely to be himself."
Easy -- so what's the problem?
This all sounds easy enough, doesn't it? So we can all resolve to follow these great investors' advice in investing for the long term, buying quality stocks during times when others are fearful and not allowing ourselves to over-trade in the process.
So here's the declaration of independence: "From this day forth, we will have the courage of our own convictions, listening carefully to rational, objective analysis, without necessarily following the herd."
The problem with this is the same as the overly ambitious New Year's resolution. We're setting ourselves up to fail.
It's very difficult to stick to the resolutions you've perhaps made on the back of Charlie Munger's advice when markets are very bad, very good -- or just plain boring! It's perhaps hardest of all in the good times when exciting stocks doing the rounds of the bulletin boards are zooming up by 20% a day, while your boring high-yield stalwarts are drifting in the wind.
But you simply have to live with this. You'll be glad you did when things turn sour and your quality stocks are still doing the business.
And by concentrating on individual value, you can take most of the emotion out of your decisions. At the same time, you want to avoid consensus opinion; positively shun it, in fact. That's what gets you into the mess in the first place.
To make this happen, you need to make yourself re-read your own short investing 'creed' before each investment decision. Also, an investing partner, or at least someone who can filter and challenge your decisions, can be an invaluable tool.
BY David Holding
http://www.fool.co.uk/news/investing/2012/01/13/how-to-stop-buying-high-and-selling-low.aspx
