Quick, Go Buy Stuff!
Have you ever hit up the mall, seen something you’ve had your eye on for months marked 40% to 90% off, and then agonized over whether to buy it or not? I’m guessing not. If you want it, it’s in good shape, and you’ve got the money, what’s there to agonize about? That it might go on sale more?
Even stranger, I suppose, would be seeing an item marked “Now 30% more expensive!” and rushing to the store to grab it before it’s gone.
But that’s exactly how many people treat the stock market. When it’s on sale, they panic and sell the stocks they own, or at the very least avoid buying new ones. When prices get marked up (especially if they get marked up a LOT) they rush to buy.
Store sales vs. stock sales: What’s the difference?
In part it’s probably in how we view owning stocks vs. owning clothes or gadgets. No one expects to go to the mall, buy a pair of boots or an iPod, and have their value increase over time. We don’t pin our retirement hopes on the physical things we buy, for the most part.
But other than that, I’m not sure there is such a big difference, because whether you’re at the mall or in the market, it’s common for decisions to be based on greed or fear.
In the case of the mall, we believe that low prices mean the items won’t be around for long. We’re afraid we’ll miss out on the deal, so we rush to buy. In the case of stocks, while we might know intellectually that low prices can mean a great deal (assuming the company behind the stock is sound), if we already own the stock we feel a painful loss and try to avoid more of it.
In other words, fear is such a huge thing that it disengages our brain.
Greed plays a part too. If we’re at the mall, we may buy items that we don’t even need or want “because they’re such a good deal”. If we’re buying stocks, we may buy without real investigation of value because we’re hoping to make a quick buck.
Take emotion out of it if you can
In both cases though, we’re a lot better off if we can step back and look at the situation dispassionately. While I do think feelings can have a beneficial impact on buying and selling things, I don’t think fear or greed are the feelings to listen to.
Invest based on a long-term strategy, not the dominant emotions of the crowd. Or at the very least, use those emotions to your advantage by knowing how they may impact the situation.