Here’s the ancient four-word secret to getting rich in the stock market: Buy low, sell high.
Simple, isn’t it?
So why doesn’t everybody do it? Psychology and emotions get in the way.
The only time you can buy low is when all the news is bad, the stock market is crashing, pessimism fills the airwaves, people you think are “smarter” than you are selling, afraid prices will go lower and they’ll lose everything. Would you have the nerve to go against the crowd and buy? And the only time you can sell high is when all the news is good, everybody you talk to is optimistic, most “experts” say the market will go higher (there’s always a few prophets of doom, but you ignore them), and you don’t want to miss out by selling too soon.
Buying a stock is easy, because it’s an optimistic decision. Selling is difficult, because there are only two times you can sell: too soon or too late. Nobody knows where the top will be, in a stock or the general stock market. If you sell and the stock goes higher, you groan because you missed some profit. If you hold on and the stock begins to go down, you groan because you could have sold it for more. So you wait for “one more bounce up” to sell. It never bounces high enough, and you wind up riding it all the way down, which leads to more than a groan.
So, have I discouraged you from trying to beat the market or becoming a trader?
Here’s another thing I’ll try to discourage you from doing: reading too much. The Internet is full of blogs and newsletters offering tips, strategies, “best buys,” etc. They’re all right some of the time. All strategies work sometimes — none works all the time. Reading an optimistic report on something you own makes you feel good. Reading a “sell” recommendation on something you own makes you feel nervous. Reading contradictory buy and sell views makes you feel — how?
It may sound counterintuitive, but in this business, the less you read, the better.
Here’s some other things to keep in mind:
Nobody KNOWS anything.
There are no experts, only varying degrees of ignorance.
If all this sounds like I’m trying to discourage you from investing in anything, that’s not my purpose. I’m here to tell you that there is a way to invest successfully — for long-term growth or for current income — and keep it simple, using a mechanical approach that minimizes the emotional and psychological traps and the need for frequent decision-making.
But first you need to become acquainted with the terminology of Wall Street and its products, to enable you to understand your choices and match their suitability to both your individual needs and personality. We’ll begin that lesson in our next conversation.