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You Buy Everything Else on Sale, Why Not Equities? PDF Print E-mail
Written by Kalson Jang   
Monday, 26 September 2011 21:44

As many of you know, the equity markets have taken a bit of a hit lately and I’m sure you’ve heard from more than one person that it signals the end of the world.  Those people are usually the type who never make any investments because they’re always afraid of losing money.  Or even worse, they’re the type of investor who “Buys High and Sells Low”.  As with any investment, there is always a risk of the markets going down, but as history has shown us, over time, the markets always end up higher than they did before.  That is why I find it very amusing when someone tells me that the financial system is going to collapse and that the world as we know it will end.

As someone whose profession is to help people manage their money and investments, I take an entirely different approach to the average Joe who’s out there.  When they are looking up to the sky and expecting it to fall, I make the moves necessary to make money.

When the markets drop, I buy.
If they drop more, I buy more.
When the markets go up, I take some profit.
When the markets go up more, I take more profit.

It sounds like a very simple strategy, but the hardest part is following through.  When people see a big drop, they think the worst and when things are going really well, they get greedy and want more.  It’s those human traits that make it hard for the average investor to make money unless they know what they’re doing.

On Boxing Day, people line-up for hours to buy something on sale.  When equities are on sale (like they are right now), people are scared to buy.  The irony is that the same investor would probably have been very excited to buy a week earlier when the markets were trending up.  Yet now that they are offered the same investment they were offered last week (at a much lower price) they are afraid to buy now.  Think about gas prices, when gas prices drop, people line-up for gas, some even bring an extra jug to buy extra gas to use later!  If oil dropped by the same amount, it's likely that the same person would be scared to buy oil out of fear that it would drop more.  When gas prices dropped, they didn't think "Wow, gas prices dropped, maybe if I wait longer, it'll be free!", but when oil/equity/commodity prices drop, they think it's the end of the world (which is as unrealistic as expecting gas to become free).

People always point to the uncertainty around the world (i.e. Greece defaulting, skyrocketing debt in other countries etc.), but what people fail to realize is that those fears are often reflected in equity prices already.  In other words, those things that people are afraid of are the reason that equities are so cheap in the first place!

They will also say that they want to wait until “everything stabilizes” before they buy.  The only problem with that is by the time “everything stabilizes”, you already missed out on the majority of the gains that were available.  Then it becomes the story of “Oh, I should have bought when it was so cheap, now it’s gone up and it’s too late”.  As a result, those people are always missing out!

If it was a 65” Plasma TV, they would buy it right away if it was on sale.  But because it’s an investment, they don’t want to buy it on sale because they’re scared.  They would feel better about buying it after the sale is over and the investment has returned to its regular price.  Logically, does that make any sense?

If you don't believe me when I tell you that this happens on a large-scale, take a look at this chart that shows the amount of Mutual Fund sales at various points in the market cycle.

Investor_Emotions

Notice that when the market was at it's highest points, sales were also at their highest points.  When the markets were at their lowest points and everything was on sale, no one was buying!  This chart proves that the average investor does exactly what they shouldn't do, "Buy High, Sell Low"!

Equities haven’t been this cheap for a very very long time.  In other words, this literally could be “The Sale of a Lifetime” for equities.  So if you want to make money, don’t follow everyone else, do what you would do if anything else in this world were on sale, buy everything cheap and sell it to everyone else when the price goes back up!

Kalson Jang  鄭家豪
Phone: 416-775-8777
E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Website: www.dynamicwealth.ca