The worst mistake by far investors make is buying when stocks are going up and selling when stocks are going down. Let me show you:
It, after all, seems pretty obvious: if stocks are going up, then things must be going well, right? On the opposite, if a stock goes down, then things must be doing bad. In both cases, the move seems obvious. This explains why most people today, following a 10% drop in the S&P500, are suddenly telling everyone to sell.
On the other side, whenever stocks are soaring, like they were just a few months ago, every single person is telling you to buy. The move seems obvious. When stocks are going down, you are losing money, so it “makes sense” to sell to cut your losses. Likewise, when stocks are going up, you are angry to “miss on those gains” and you want to buy.
Yet that mentality alone is by far the biggest mistake one could ever make. It’s dazzling how these stupid atavistic mentalities can survive year after year.
The ultimate stock market secret
Whenever a stock falls, you should be looking to buy. Whenever a stock rises, you should be looking to sell.
That doesn’t mean you WILL buy or sell, but it should be your natural reflex. Apple at $96, crashed 30% since top? It’s time to buy. GPRO hits $100 after doing an IPO at $29? Start thinking about selling. Or if you can’t tolerate looking back at the past:
Yes, I am thinking about buying right now. And you should be as well. After all, you can buy the index at a 10% discount from just two weeks ago.
“But FS, if you wait, you’ll be able to buy at a 20% discount LEL”
Maybe. Maybe not. You don’t know that. Nobody does. You may have a guess - RBS might have a guess as well - but it all remains speculation. You DON’T know where the index is going, period. In fact, if anything, probabilities show us that a recovery is far more probable than a further crash. Do you risk losing 5%, 10% or perhaps more of your money? Yes, but the risk is present at any time; it didn’t simply materialize in the last two days.
Do you honestly believe the economy suddenly crashed by 10% in two weeks?
But but but the market was overpriced at 2,100
You DON’T KNOW THAT. How many times must I repeat it? You don’t know if stocks are overpriced with a S&P500 at 2,100. Hell, the market could even be undervalued at 2,100 for all you know.
But but but economic growth! Crashing oil! Crashing China!
All of this is already priced into the stock market. I’m not saying the market is perfectly efficient, far from it, I’m just saying that by the time you hear about something, the big firms have already gotten 10 research reports on it.
Sure, the situation might get worse, but it may also get better. Again, you DON’T KNOW THAT.
As for every element you could bring to justify the crash, let me reassure you that the true can also be said. Here:
|Going up||Going down|
|Oil||Oil too expensive! Consumers to cut spending! US Trade Deficit Explodes!||Oil is crashing! Job cuts in energy sector! Mass bankruptcies to destabilize banks!|
|China||China soaring, shows how weak US economy is! China to overtake USA in all fields, US companies to lose jobs to the Chinese!||China going down, to drag entire market with it! Worldwide economy weakens, growth to subside!|
|US Dollar||US dollar too strong, to reduce profits of domestic companies!||US dollar crashes, reveal how vulnerable economy is! Cost of imported goods to soar!|
|US Jobs||Strong US jobs increase odds of rate hikes! Job market unable to cope with influx of new workers, wages to go down!||Weak US Jobs shows crashing economy - mass unemployment to follow!|
Do you see? There’s always a way to spin a news in a negative or a positive manner. All of that stuff is completely worthless.
But but but catch falling knife!
Another stupid fallacy that I’m sick to death of hearing. By this logic, you should never buy a crashing stock because it could fall further. By the same logic, if we do the opposite, should you always buy a soaring stocks because it could rise further?
The issue with the falling knife is: if you don’t want to buy a stock going down, when are you going to buy? “I’ll wait for a bounce!” says the moron. Alright, here’s your bounce:
It bounced from $4 to $9. Do you buy? Has it finally hit bottom?
Yeah, except you actually bought Nortel, and your stock is going to zero. Another example?
Do you buy? The stock crashed from $15 to $4 and now sits at around $10. This is more than just a small rebound. Do you buy?
Except this is GTAT and your money is going, once again, to zero. Well, 0.09 to be fair.
I could find dozens and dozens of example of such companies. Just because a stock goes down doesn’t mean you shouldn’t buy it. Just because it bounces doesn’t mean it’s suddenly not a falling knife anymore.
I made almost all my money from doing moves opposite from what the market told me to do. Look at this one for example:
At the time I bought it, at $8, it was paying a 18% dividend that was well covered by earnings. It seemed oversold to me and undervalued; I also did not see the demand for chemical acid fall that much and even if it happened, I did not see it staying low for too long.
It quickly fell to below $6 and I lost 30%. Did I give a shit about it? At the time, yes - I was pissed off. But do you think I give a shit today, now that’s it’s at $20 (plus the dividend I cashed in all that time and to this day)? Of course not.
Similarly, do you think you’ll give a damn in five years whether you bought the S&P 500 at 1,880 instead of 1,820? Barely, let me tell you.
“Okay, but what if it crashes 10% tomorrow morning?”
What if it soars 10% tomorrow morning?
Also, what makes it more likely to crash 10% tomorrow morning when compared to a month ago? A couple of rumors and hearsay?
The opposite is also true
It’s very hard to sell a soaring stock. I couldn’t sell AAPL at $130. I ended up selling at $120 for reasons unrelated to the stock market. I’m not going to pretend I saw the crash below $100, I just needed money for other projects. Am I looking at buying back into Apple today? Of course.
Overall, it’s terrifying how many investors don’t learn from their mistakes. I mean, look at all the crashes and recoveries we had just in the last year:
Every time, the news were as pessimistic. At one point, it was Greece about to destroy the entire Europe (lol). Then it was something about Ebola and trains not delivering enough goods - not sure about this one. Right now, it’s oil and China. Who knows what it will be in six months?
If I had to bet, I would bet on a recovery in the S&P by the end of the month. I’m going to be conservative and bet on a recovery by the end of February. I will be shorting SPXS - shorting a triple etf bear (i.e. if S&P rises 5% in a day, SPXS crashes 15% - I am going short on this one) starting tomorrow morning. If the market crashes further, I’ll just short more SPXS.
THAT’S the proper way to think when you invest.