Buy Low-Sell High or Is It The Other Way Around?

If you haven't learned   you should buy  cheap and sell dear you’ve been living in a cave all your years. The problem is some folks do that with almost everything except their investments. When it comes time to invest people want to make sure that the stock or fund is truly going to go up and so they wait until it does and then buy just about the same time other folks are selling.

If you think I’m kidding let me introduce you to G.O.L.D. Amateur investors wouldn’t give the time a day for the shiny stuff except when talking heads started to make noise and the metal traded per ounce right to the price of a used ‘66’ Volkswagen  bug.  All of a sudden people just had to have it because a ubiquitous someone said it was an answer for inflation and for the world’s soon-to-be-worthless paper money. Three years back they didn’t like it at half the price but suddenly it’s the rage and everyone’s got to have it in their portfolio.

When the markets tanked everyone was scared and wondered if this was the end of the world and would we be selling apples to each other till the end of days. After the lights did not go out and some respected investment minded folks stood up and said stock prices were rather reasonable people still thought it best to take a loss and put their money into money markets earning nothing rather than buying stocks or funds that were on sale. If stocks were cans of tuna fish and selling for half the price they would’ve been flying off the shelves.

The average investor today is more scared of losing money and is skeptical of buying opportunities.

I was there a year and a half ago when folks would call and ask if things were going to go to hell in a hand basket or would they lose everything they invested. I tried to tell one and all to continue to do the things they were doing and try to ignore the noise and hype but when the rest of the world is saying the opposite its pretty hard to be heard.

The people who came out ahead in this latest mess were the people who kept on buying and did not sell what they owned. Those that lost were those that sold and now wonder if they’ll ever get back a fraction of what they once had. In a world of unhappy people you have to put them somewhere near the top.

The reason I am bring this up –again- is that Bloomberg BusinessWeek magazine had a small piece last week that reported the average investor is notorious for buying high and selling low. The small investor appears to have a compulsion to do this each time there is a massive market correction. We saw this in 1987 and again in 2000. The only time I saw investors come out and buy cheap is when certain companies were about to, or did, file for bankruptcy and all the smart money had sold and the average investor thought they smelled a bargain and bought. We can name those companies as K Mart, GM and Enron, plus there were others but why make some folks feel worse then they already are. There is a rule that you do not buy company stock that is about to enter or that is in bankruptcy. 

Amateur investors also shouldn't chase a stock price simply because someone says so ( ala Ze Mouth Cramer). The fact is by the time Ze Mouth says it the bus has already left the station and amateur investors find themselves chasing it. The investor would be better off either waiting for the bus to come back to the station or find another bus to get from here to there. There are always funds and stocks that are selling at value prices.

If you want to be a buyer of value there are ways to do it without learning all the technical chart reading. One way is to watch the VIX. The VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index. It is a measure of the implied volatility of S&P 500 index options. It is calculated and disseminated in real time by the CBOE. It is also known as the fear index. When the index rises it usually corresponds to a fall in the S&P 500 index. Many investors use this as an indicator of buying cheaply.

chart of the VIX index 1990-2008 Wikipedia

If you were to draw a chart of the VIX and overlay the value of the S&P 500 index illustrating the trading over the same period you’d not be surprised to see as the VIX rises, as fear increases, the S&P 500 dips. You can see this by going to the finance site at Yahoo.com and clicking on their stock charts. Friday August 6th was a good day to see the VIX and S&P 500 work in opposite to each other.

This is not a perfect way to invest but it is one method where investors know the major stock index is down, Treasuries are usually up and you can be fairly certain of buying low. This is not to say that things will not go lower, they can. When they do go lower the VIX will go higher and the smart money should buy more. There is no guarantee that prices will reverse immediately or even in the near future. It does give an investor a simple tool to buy low when all others are selling. It certainly beats listening to others who probably know less then you about the economy and how markets work.

If you have questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.