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 (GE -3.19%) and Dow Chemical (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 (IBM 0.06%) 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.
