Over the years, the chief failing of many investors is the tendency to buy high and sell low. This was evident during the Irish property boom of the late – nineties and noughties. Property became more popular as prices increased, with more than 85,000 houses completed in 2006 and 2007, almost triple the number built in 1995.
This experience is also repeated regularly across stock markets. For example, back in February 2009, when market indices were close to their 2007/9 crash lows, very few investors were interested in buying stocks. This was a missed opportunity – just look at the gains recorded across a variety of major markets since that time.
These are pretty impressive results, particularly when one considers the returns available on bank deposits. It is also worth noting that the above gains do not include dividend income, which matched or exceeded interest earned on deposits over this period.
Why did so few investors buy when stocks were on sale? There are a number of reasons but ultimately it comes down to fear. There was such an abundance of bad news and gloom about that the average investor was simply too scared to buy. In reality, many were selling rather than buying as they believed that market prices could fall further. On the other hand , those savvy investors with strong constitutions, were ‘backing up the truck’ and snapping up these bargains.
Once we have sold, we are determined never to touch stocks again. As time passes, we watch the market start to rally and see our friends making money and before long we are back in the market – it would be such a shame to miss the party. Unfortunately, at this stage prices are much higher and the easy money has been made.
For example, from 2006 to 2012 US investors withdrew $450 billion from stock funds. It was only in 2013 that these investors started ploughing money back into the market; albeit a little late – the US market was already up over 100%.
Investment success is not merely a matter of possessing more information or skill. It requires a change in behaviour – we need to learn to overcome our natural inclination to pursue those things that give us pleasure or security (buy when news is good and markets are rising) and to avoid pain (sell when news is awful and markets are collapsing). We should strive to do the exact opposite. In the words of Warren Buffett, we should try ‘to be fearful when others are greedy and greedy when others are fearful.’
Markets have enjoyed a good run of late but it is quite comforting to see there is still some fear and uncertainty in the air. This means they can go higher as these fears recede.