Too Many Investors Still Don't Get It

We've all heard it before: buy low, sell high. It's a pretty simple concept, and one that has stuck around for so long because it works. And yet, for some reason, it remains one of the most difficult things for investors to actually do. Even now, with the Dow above 16,000, a new Gallup survey finds that the majority of U.S. investors are bearish on stocks, just as they were during the height of the recession.

But for those with retirement or other long-term financial objectives, investing in stocks has always beaten slipping cash under the mattress. So what is it that prevents people from actually buying low and selling high?

Some data
The lack of investor optimism, according to the recent Gallup poll, might be explained by the notion of buying low and selling high. With the stock market soaring, you could argue that now may not be the right time to invest. Apparently, that's what many Americans think.

Of the 1,014 U.S. citizens with more than $10,000 of investable assets surveyed, a mere 37% said the stock market was either an "excellent" or "good" means of growing assets. That number jumped to 50% for those with $100,000 or more to invest, but only 27% of those with less than $100,000 to invest felt confident stocks were a good way to create wealth.

What did you do?
The recent economic crisis was an ideal way to measure where investors sit on the "buy low, sell high" scale. Many U.S. investors ran for the proverbial hills when stocks started their precipitous drop in 2008, cashing out paper losses for real ones. What too few long-term investors seemed to appreciate was the incredible opportunity the nearly 50% decline in the S&P 500 index presented. Warren Buffett wasn't one of them.

Buffett has generated about $10 billion and counting from the recession, and it has to be about the easiest $10 billion he has ever made. In the midst of the market's plunge, he poured billions of dollars into bellwether companies like General Electric (NYSE: GE  ) and Dow Chemical (NYSE: DOW  ) . These companies were never going to disappear; they were simply caught up in the same downward spiral as the rest of the economy.

But Buffett's investment approach didn't waver: "Be fearful when others are greedy, and be greedy when others are fearful," as the Oracle of Omaha famously said. While Buffett was making his investments in GE and Dow, investors' optimism had reached an all-time low, according to a Gallup survey at the time.

The primary difference between Buffett and the average American investor, as Gallup consistently shows us, is conviction. Buffett doesn't simply tell us to buy low and sell high; he actually has the gumption to do it.

A quick story
IBM's (NYSE: IBM  ) stock price hit $10.50 a share in July 1993 -- about half its value from the year before. As a financial advisor, I couldn't call my clients fast enough; the phone was ringing off the hook. Everyone, to a person, wanted to sell, sell, sell. Thankfully, there were a few who listened when I suggested the best thing they could possibly do was buy, buy, buy. IBM was having troubles, sure, but it wasn't going anywhere -- it's IBM. That, like the recent recession, was a fantastic opportunity that too few investors were willing to exploit. As Buffett said, that was the time to be greedy.

Final Foolish thoughts
The holiday shopping season is a great time to consider the value of buying low. Why would anyone go through the agony of Black Friday if not for good deals? For some reason, shoppers are willing to climb over each other to save on a big-screen TV, but the thought of buying a stock like IBM when it's down makes investors skittish.

When the market's up, like it is now, Gallup's poll suggests that U.S. investors are bearish. When the market's down, as it was a few years ago, investors are even more averse to buying stocks. Too bad for them. "Buy low, sell high" should be more than a catch phrase. It should be your investment mantra.

A few long-term buys to consider
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.


Read/Post Comments (9) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On December 23, 2013, at 2:11 PM, pondee619 wrote:

    " In the midst of the market's plunge, he (Buffett)poured billions of dollars into bellwether companies..."

    Must be nice to have BILLIONS of dollars to invest at any given time.

    "Be fearful when others are greedy, and be greedy when others are fearful,"

    A whole lot easier to do when you have BILLIONS to invest at any given time. However, when you haven't got BILLIONS to invest, and you see 50% of your nest egg evaporate and you really have no guarantee that the market will bounce back, I submit that Buffetts advice might be a little harder to follow.

    "Be fearful when others are greedy, and be greedy when others are fearful," WHO are these "OTHERS" who are greedy and fearful at the wrong times? Perhaps it is all of us who don't have billions to invest. If Mr. Buffett lost 50% of 10 billion dollars he still can manage to live off of $5 Billion. (Would still be able to maintian a pretty cushy lifestyle). Should you or I lose 50% of a 500K investment account our retirement income is halved and it will no longer last as long as we will!

    Buffett has nothing to lose. He can lose 90% of his holdings and still have more than 90% of the rest of us. He can be greedy when we are fearful. We are fearful because their is a real sense that we can lose EVERYTHING.

    Warren Buffett is playing on a different field than the rest of us. His game has a different set of rules. He can afford to be greedy when we are fearful because he has no reason to fear. He will always be richer than us, no matter what happens in the market. Vanderbilt, Carnegie, Morgan and Rockefeller all survived the depression far better than any common person. Buffett will do the same. Why should he be fearful? He has BILLIONS to invest. He plays a different game with different rules. We can't play that game. We need to play another one.

  • Report this Comment On December 23, 2013, at 6:52 PM, popeye1250 wrote:

    This is real simple, I'm just not going to invest until President Snow is gone.

    I sleep well.

  • Report this Comment On December 23, 2013, at 9:23 PM, neamakri wrote:

    dear pondee619;

    I see that you are very bitter from your loss. Here is my story...I also lost 1/2 of my capitol. I took control and now have twice my original amount, or 4X my lowest amount after 5 years of investing.

    I am sorry you missed the point of the story. "be greedy when others are fearful" IS TRUE.

    When American carmakers tanked, all auto stocks plummeted. I looked at Tata motors in India. They were completely different than American producers yet TTM stock dropped dramatically for no reason (fear). I was "greedy" and purchased some TTM. Sold it a couple of months later for a nice 18% profit. This is a TRUE example that proves the rule.

    Example #2: satyam (SAY), another Indian company, had a real bad PR story about its CEO. I made 60% on that "greedy" investment.

    Opportunities come along rarely, but be "greedy" when they happen.

  • Report this Comment On December 23, 2013, at 9:59 PM, teddylevy wrote:

    I'd like to respond to Pondee in a different way.

    As you point out, people take risks with their money when they invest. That's why it's commonly advised that one should only invest what one can afford to lose. And you're correct in saying that the biggest investment tycoons can afford to lose billions.

    The rationale for being greedy when others are fearful applies just as much to the person with $10,000 to invest as to the one with a billion dollars. Either way, the individual should take the money they can afford to lose, and invest it in a diverse group of quality companies, achieving the greatest benefit by doing so when others are running for the hills.

  • Report this Comment On December 23, 2013, at 10:38 PM, DadofThree wrote:

    teddylevy: the individual should take the money they can afford to lose and go to the casino. He should take the money that he needs to grow in the long term and invest it in a diverse group of quality companies.

  • Report this Comment On December 24, 2013, at 9:14 AM, pondee619 wrote:

    Neamakri:

    You don't know me nor my position. I'll thank you to keep your infernces about me and my holding to yourself.

    My losses have all been recovered. I'm up. I've held, and bought consistently, through the market drops since 1984. (1987 was not a fun time to be young and new in the market, particularly after living the experience of my Dad trying to invest and make money investing/trading during the seventies. Look at a chart of the Dow from 1969 through 1979, See much gain?) I still remember Nixon kissing a chart of the Dow when it broached 1,000 for the first time. It took a decade to get there again and stay. http://stockcharts.com/freecharts/historical/djia1960.html ('66 to '84 look a little like 2000 to now?)

    I haven't missed the point of the story, I just point out that we, normal people, don't/can't invest like Buffett. The apparent hero of fools through out this site. Invest like Buffett? You might as well say that I (a 12 handicap) should golf like Woods or Phil Mickelson. Ain't going to happen and, if I try, I'll get seriously burned.

    When the market tanks 30-50% we CAN'T invest Billions. If you have just lost 30% of your retirement account, a sum that took a decade to amass, leaving a sum that will now fail to meet your life expectancy by 15 years, you really can not fault that person from shying away from the market, the demon that put him/her in this position in the first place. It takes great nerve and faith to continue to sock your $300-$500 per pay into the stock market. But THIS is the advice that should/must be given.

    People (normal folk) invest regularly into their 401Ks, IRAs (either type) & pensions in little amounts, saving over time. People do not invest like Buffett. When was the last time you could buy a company, or lend GE billions? Yet the Great Buffett keeps being placed on the pedestal like a guiding star for all of us to be lead.

    I know it is hard to continue to have faith in the market when you just suffered a loss through no fault of your own, because I have done so. Several times. (See market crashes since 1984) Throwing a platitude; "Be Greedy when..." offers no real advice. Pointing out a man (Buffett) who can invest billions at each market correction also is useless, people do not invest like that. We invest $300-500 per pay over a long period of time. A market correction wipes out years of faithful savings. Telling that person to invest another $xx,xxx.xx is just silly. He probably dosen't have it and still be able to maintain a safe emergency fund of liquid assets. (We all still have that, right?) And still be able to sleep at night while meeting his/her daily needs to him/herself, family, mortgage, food, college, etc. Telling that person to continue with his/her investment plan, no matter how hard it may seem at the moment, is much more apropriate and much more likely to be followed. Telling that person to plunck down whatever capital s/he's got left into the market will ring hollow and be ignored.

    The Motley Fool was the investment newsletter for the common person, the working girl, the family guy, the recent grad starting out. "Invest like Buffett" can't happen because these people can't do it. We don't have the funds, we can't "have a holding period of FOREVER". Our holdings will be used in our lives within some finite time period.

    "The primary difference between Buffett and the average American investor, as Gallup consistently shows us, is conviction." BS. The differences are billions of dollars and no need to actually have to live off that money at some time.

    Holding Buffett, continuously, as the person to be emulated is doing readers of The Motley Fool a dis-service. The Ant and the Tortoise should be our sole role models.

    and neamakri :

    Your holding period of a "couple of months" on TTM isn't investing. Congrats on getting lucky.

  • Report this Comment On December 24, 2013, at 11:07 AM, taplinger wrote:

    Amazing how naïve the author can sound at times. He says Buffet bought GE because it wasn't going away. GE was so heavily into finance it would have gone away were it not for a government bailout. Were it not for a government bailout, Buffet could have kept it afloat. We can't do that. And huge established companies have gone away - what if you had bought GM or Kodak at their low?

  • Report this Comment On December 24, 2013, at 1:29 PM, johnestromjr wrote:

    You're wrong. Americans do want to invest in the stock market. Why aren't they? For very good reason. They see Wall Street as corrupt, they see insider deals, market manipulation by the uber wealthy, they see the lies and deceit, they see corrupt regulators not doing their jobs and they don't want to give their money to an industry that is so jaded and dishonest it stinks to high heaven. They don't want to lose their money to the crooks to put it bluntly. There is a LOT of money that could be in the market but the market is a cesspool of shady deals and shady people run by a tiny handful that are greedy beyond greedy.

  • Report this Comment On December 25, 2013, at 9:11 AM, Jawrig wrote:

    Investors do not get what? That entire system is now a ponzi scheme and they will rip you off!!

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