Home > Education > Why is it psychologically difficult to buy high and sell higher?

Why is it psychologically difficult to buy high and sell higher?

Thursday, July 19, 2007 Leave a comment Go to comments

If you are a trend follower or “momentum” investor, then you have to buy high and sell higher! Even though I have proved to you that this is one of the few things that actually works in the market using “Infosys Trend Analysis” article as well as through my various stock picks like Asian Electronics or Reliance Industries,most of the people find it difficult to do so.

One may ask-if I am convinced that this makes money for me, then why won’t I follow it?

Simple-because our minds are not trained to follow this advice.

Tell me what happens when I show you chart of a stock like L&T, BHEL or Bharti which is hitting all time highs. The first thing you notice is that stock has “already’ gone up 2-3 times. Now you start thinking- the stock is already trading too high, what will I do if I buy “now” and stock falls? What if this is the top for the stock and the market?

Slowly your “fear” of losing comes into play and you can’t muster enough “courage” to jump in!So you let it pass.

Why didn’t you buy? You didn’t buy because you didn’t want to feel the pain of “losing”! Absolutely fine- who wants to be a loser in the markets?And more importantly, who wants to have “pain” in his/her life? Good decision!

Next lets see what happens- the stock you missed out,say Bharti, doubles in value in next three months. Now what do you “feel”? You start to the pain of “having missed out”. Oh- I wish I had invested my money in Bharti and doubled it! Everytime you see that stock moving up, you feel that pain.

Next lets say the stock starts to move up very fast. At the same time your friend tells you that he almost tripled his money by investing in Bharti stock.This causes that “pain of missing” very intense. When you can’t stand that “pain” anymore , you jump in and buy the stock. You get some relief that “finally” you are in the same boat as everyone else!

The stock continues its upmove for a few more days-you feel happy and proud of your decision. Then suddenly, one day the stock reverses and starts to trade below your “buy” price.Now what do you feel- you actually ‘feel” the pain of losing and the pain of “being wrong”. You start to “hope” and “pray”. Your losses mount up everyday and so does your “pain”. Finally to “avoid” that pain, you sell the stock at a heavy loss. And as soon as you sell the stock, you find that the stock begins to rise again. You were “unlucky” to have sold at the bottom! You say to yourself and the world- this market is manipulated, this market is for gamblers etc etc. End of the story!

If you observe closely, this is how most of the people behave in the markets(even professional investors).Check out what happenned in India and US during the 2000 technology bubble.
Many people have missed this rally in Indian Markets because they couldn’t afford to buy high.And now they are feeling the pain of “missing” out this rally. This rally might “end” when these guys can’t stand this pain and finally jump in!Now will that happen at 4600,4700 or 5000-it is very difficult to say.

So in a nutshell “pain avoidance” and “loss avoidance” causes us the most harm in the markets. Either learn to identify and confront this “pain” or continue to “lose” money in the markets-the choice is yours.

Let me know of your observations and share your own experiences.What stops you from buying high?

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  1. sagecapital
    Thursday, November 15, 2007 at 6:02 pm

    We cannot be emotionless. We are humans and not robots!
    What do you mean by “going by value for entry”?
    Do you mean “value” as defined by fundamentals?

  2. anil bansal
    Thursday, November 15, 2007 at 4:12 pm

    Sage – You have a point there. I do not have a rentry strategy so to say. and as a trader one should be emotionless. but I usually go by the value for rentry, or maybe enter another stock. may be you can throw some light on it.

  3. sagecapital
    Wednesday, November 14, 2007 at 8:03 am

    Anil-As a trend trader, I have no choice but to follow momentum.
    I fully agree that you need to find a style that “suits you”. At the same time you need to pick a “style” that works!
    I don’t invest in markets to feel “comfortable” or ” feel pride” or “feel excitement”-its just to make money and trade well.

    What is your definition of a “mistake”? My biggest mistakes are “not following my system”. Even if such a trade brings your profits, that is still a mistake!
    What is your method- momentum or value or something else?I see your repeated calls to “book profits” ever since NIFTY was close to 5000. Considering that you did that, what is your strategy for a re-entry?

  4. anil bansal
    Wednesday, November 14, 2007 at 7:46 am

    Sage- I do not like to make mistakes. But nobody is infallible. I do make mistakes. Point is to recognise a mistake and get out fast.
    sure there is no perfect system. but I do maintain that the trading style should suit the temperament of the speculator. look at reliance capital, RNRL, RIIL, RPL they were less than half their prices 3 months back. if at all that was a time to get in and now the time to book profits. why be a part of the momentum.
    chees

  5. sagecapital
    Wednesday, November 14, 2007 at 6:49 am

    Anil – Investing is all about making mistakes. There is no “perfect” strategy out there that will make you money during all the times.Its all about “being wrong” rather than “being right”.

  6. anil bansal
    Wednesday, November 14, 2007 at 6:33 am

    fear and pain are the negative feed backs that will save you always. fear and pain of losing your capital are definitely valid and should never be ignored. the pain of losing arises out of green and should be ignored.
    the opportunities come dime a dozen. also realize that your friend who made money in a momentum stock did so by an accident not because of his intelligence.
    After all experts like the sage also make mistakes. they work on probablity of making less loss making trades than profitable ones.
    always better to look for stock in accumulation mode and hold on to them and make profit later.
    examples: India glycol 112 6 months back. monnet ispat 150 8 m0nths back. abg shipyard 225 6 months back. simplex infra 320 2 months back. jinal poly films 150 3 months back. marsans pharma 45 3 months back. all these stocks have gone up several times.
    choose a trading style that ssuits your temperament

  7. Gaurav
    Monday, November 5, 2007 at 5:49 pm

    It’s not just fear, it’s greed as well. Let the stock fall back a bit and then I will buy, that way I can make more money. So both fear and greed at work.

  8. Saturday, July 21, 2007 at 3:25 pm

    1. Fear of entering at the top
    2. Fear of market correction as it has topped out
    3. Less awarness of the stock as to why and what made this stock rally hitting new highs
    4. Guessing the top and bottom
    5. Previous failures experienced with this stock

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