Sunday, December 27, 2009

Be a Successful Investor: Buy Low and Sell High – Don’t Follow the Herd!

Here are some characteristics of successful investors:
  • Successful investors don’t follow the Herd.
  • Successful investors don’t listen to the Media.
  • Successful investors stay in the Market.
When investing, most people have heard the saying “buy low and sell high”. But do you think that is what people actually do? There is contrary evidence to this advice that shows that a great deal of people actually “buy high and sell low”.

First of all, I would like to clear up some terminology before I get into the explanation. In this article we discuss the S&P 500 Index Value. The S&P (Standard & Poor’s) 500 Index Value is a calculation based on 500 widely held public companies in the United States weighted based on market value. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Large cap companies are generally, companies with a market value (capitalization) of over $10 billion and are typically well-established with solid histories of growth and dividend payments. Also, when discussing time frames, this article uses references to quarters of years. Q1 or quarter one consists of January, February and March; Q2 or quarter two consists of April, May and June; Q3 or quarter three consists of July, August and September; and Q4 or quarter 4 consists of October, November and December.

Click to Enlarge Image
The graph above shows the actual flow of money into and out of the stock market for a ten year period (from the fourth quarter of 1998, all of the way to the fourth quarter of 2008). If you look at the bottom scale of the graph, you can see a horizontal timeline of years with tick marks in-between, representing the different quarters of the year. If you look at the scale on the right side of the graph, you can see the S&P 500 Index Value and the actual value is represented by the black line that is squiggling up and down horizontally across the graph. If you look at the scale on the left side of the graph, you can see the net new flow of money in the millions of dollars into or out of the stock market. And this is represented by the vertical bars that move horizontally across the graph, where each bar represents a different quarter in a year.

This graph depicts exactly what happened in the stock market for a 10 year period.
OneLarge inflow at market peak. In the first quarter of 2000 the market peaked. As you can see from the graph, (remember that the net new flow of money is represented in the millions of dollars) during that market peak, almost $120 billion of new money was put into the stock market.
TwoLarge outflow at market bottom. In the third quarter of 2002 the market tanked and there was a lot of fear in the market. Looking at the graph at this time, you can see that almost $45 billion was taken out of the stock market.
ThreeLarge inflow after 2003 gains. Furthermore, in the first quarter of 2004 the stock market rebounded and we were in prosperous times once again. During this time there was a large influx of new money into the stock market – almost $120 billion!
FingerOctober 31, 2008. Again, you can see, from the end of 2007 to the end of 2008, after the housing bubble busted, the stock market was in a free fall. During the month of October 2008 alone $55.8 billion dollars was taken out of the stock market.

That sure seems like buying high and selling low to me!!

The Money Message:
  • The “Stock Market” has always gone up and down in relatively unpredictable ways -- and will continue to do so.
  • When the “Market” is low, a given amount of invested money buys more shares -- then, when the “Market” goes up, the investment grows. The key is: “Buy Low & Sell High”.
  • Wise investors are in the “Market” for the long term -- and love “Market” fluctuations because they understand, and use, “Dollar Cost Averaging”
I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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