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Buy high, sell low? Investors let emotions control strategy

Tuesday, July 28th, 2015
By: Chase Wilsey 

All investors know that to be successful, they must buy low and sell high. Unfortunately, people break the rules of logic when the market starts to fall.

They allow their emotions to get the best of them and instead, they are buying high and selling low.

Many people think that an easy way to invest is to buy into an equity mutual fund to practice the buy-and-hold investment strategy.

History has shown otherwise.

During the dot-com bubble, the market grew at a rapid rate and many investors poured their savings into equity mutual funds. From 1995 to 2000, people invested more than $1 trillion dollars into these funds.

Unfortunately, when events panicked investors and the market was down 23 percent in 2002, many investors pulled out of their equity mutual funds.

Net new cash flow (the dollar value of new sales minus redemptions) in 2002 for equity mutual funds was a negative $29 billion dollars. Many of those investors who panicked and pulled their money out at the bottom missed out on a 26 percent return in 2003.

The Great Recession provides another point in history when investors allowed their emotions to take control of their investing strategy. In 2008, the market was down 37 percent and many investors did not think it could recover.

They believed it was safer to sell out of their stocks so they would not lose any more money.

The Great Recession panicked so many investors that net new cash flow in equity mutual funds from 2008 to 2012 totaled a negative $535 billion dollars. Meanwhile, investors who were staying away from stocks because they perceived them as risky were missing out on annual returns of 23 percent in 2009, 13 percent in 2010, and 13 percent in 2012. It wasn’t until 2013 when the market returned 30 percent that net new cash flow became positive in equity mutual funds, and investors felt stocks were safe again.

Allowing emotions to control investment decisions results in the terrible strategy of buying high and selling low. As a result, people begin to perceive stocks as “risky” because they are losing money. At Wilsey Asset Management, we buy small pieces of large companies and check the fundamentals for those companies on a weekly basis.

This way, when the market begins to fall we can look at the companies we own and see that they still have good qualities. We know that even though the stock price may be going down, the company still has qualities such as low debt, good management and — most importantly — they are still making money.

Understanding the functions of the business and relying on fundamentals instead of emotions allows us to make better investment decisions.

Even if you are able to control your emotions and remain invested, mutual funds still present risk in down periods. History has shown that most investors are unable to control their emotions, and that they will panic and sell out of equities when conditions become frightening.

Mutual fund managers may have to sell out of stock and convert to cash to meet the redemptions being requested. This ends up hurting fund performance as they end up selling stocks in down periods instead of using the market as an opportunity to buy.

When markets fall it’s a great time to buy pieces of wonderful companies. It is almost like going into your favorite store and seeing your favorite shoes or watch on sale.

At Wilsey Asset Management, the stock market is like the store and the companies we are buying are like those coveted items you have wanted but just couldn’t afford before the sale.

Buying great companies on sale is a way to use the investment strategy of buying low and selling high.

This strategy will result in profits from the stock market, which should eliminate the misconception that stocks are risky.

Do you have a question or a company you'd like me to take a look at? Email me at Chase@WilseyAssetManagement.com!


Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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