I was having lunch with an old high school friend of mine the other day. Since our school days, he has gone on to owning and operating a successful stock brokerage and investment firm.
He is not your typical brokerage president, because, aside from his day-to-day duties as the firm’s president (there are lots of duties!), he is also the head trader. And probably the best trader I know.
We were discussing, amongst other topics, why most people fail at trading and investing. I had to ask him, “What makes people buy stocks?’ He didn’t miss a beat and gave me a one-word answer… “Fear.”
“Fear of what?” I asked. “Fear of being left out,” was his simple answer.
Basically, he went on to say that most people can’t stand the idea that they are missing out on a rally. They are scared they are being left out… that someone else is going to make money without them joining in on the fun.
These are the investors and traders who suffer from a herd mentality and become the eventual victims of pro traders. They often enter the market out of greed and exit near the bottom out of panic. If they make it through the panic stage, they are often content to break even in light of the emotional roller coaster they have been riding.
The hardest lesson my friend says he ever learned is knowing when to stay out of the market. Knowing that the time is not right. The hardest decision is often not making one.
Here at PROFIT CONFIDENTIAL, we see the wisdom in these words. We recognize that entering the stock market, be it for short-term trading or long-term investment, is a lot like entering a war zone.
But you don’t have to be the sharpest, most well-educated person to succeed as an investor. You do, however, need to be armed with some appropriate knowledge.
A lot of knowledge can be gleaned from looking back at previous market behavior. Doing so today tells us that valuations are way out of whack for the majority of NASDAQ and Dow stocks.
During booms, valuations grow bigger and bigger, and during busts, they implode back to “undervalued.” But, as the market booms (I’d call a 40% annual increase in the NASDAQ a “boom”), more and more investors pile in, afraid of being left out. They make somebody somewhere rich, but seldom enrich themselves.
In fact, with the kind of valuations we are seeing today, history tells us a bust may coming. Stick with buying quality, not quantity.