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Buy High, Sell Low… Wait That’s Not Right

12 Feb

I’m going to use my blog as a tool to help people understand personal finance. After studying finance in college I realized that it’s an out-dated science. There are some old concepts that work, but there are even more concepts that need to be revamped. This blog will be used in a manner that will help educate readers on the basics of personal finance, while looking at investing techniques to accomplish financial success.

Everyone has heard the term buy low and sell high. It’s interesting to me how everyone knows this general concept, but events like the real estate bubble still occur. This morning I was reading an article called Stock Market Psychology- Why We Buy High & Sell Low by Shibashake. In this article I think they nailed the psychology behind bad investing. I’m going to go over one aspect of the article now; however, I would recommend reading the whole thing.

When you’re young it’s common to make a mistake and then blame it on friend. Your parents might have said “If your friend jumped off a bridge does that mean you should do it too?” According to the idea of social proof, you probably would. Social proof is the idea that if people around you are doing something, you’re likely to rush in and do it too. This relates to investing because sudden high volumes of demand on a stock will inflate the price. This means that you’re more likely to buy this stock even if it’s overvalued. The article makes this seem like a bad thing, but I have a different take on the matter. When I was a teenager Google announced its IPO ($100 a share). I really wanted to buy some, but my dad talked me out of it. As time went on, Google’s share price kept climbing and climbing. I knew I made a mistake not following my gut. My father wanted to save me from social proof, but if you’re able to get on the bandwagon early it isn’t always a bad idea. In fact, it can be a great way to gain big profits. The ideas to keep in mind are that it’s important to protect yourself and understand what you’re doing. If you’re going to take a calculated risk, make sure you set up a sell-stop order. This will prevent you from losing too much money.  You set the sell-stop price, and if the price falls below the set amount it will automatically be sold.

If you decided that you would rather try to avoid social proofing all together (which is what I would recommend to beginners), the article has one ingenious way to get around it: THINK BEFORE YOU ACT! It seems so simple, but we all know how easy it is to rush into a decision. The article suggests coming up with an investment strategy to prevent this. I agree that this is the easiest way to gauge if your investment is well thought out, but I also know that many people won’t want to take the time to do this. My suggestion to those people is to set up a time frame that you give yourself to think about the investment. Unless you’re a big player, a solid investment won’t require a split second decision. Once the time frame is up, go ahead and make your move.

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Posted by on February 12, 2012 in Uncategorized

 

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