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Buy High, Sell Low
by Tony DiSorbo
It violates the most fundamental element of investing, yet thousands of investors practice it every day. As soon as the market or sector they are investing in loses ground they sell and go looking for the hot market. Eventually a new fund or sector with some strong recent gains is chosen to invest in and the investor is again confident that he or she is back on the fast track to riches. Then it happens again, an again and again. All the instruments they purchase have proven track records, yet their overall portfolio reflects a below-average return.
Or maybe the investor hopes to stay ahead of the game and pulls out of equities because the last two years have had significant gains and we are "due" for an adjustment. Then the next two years have even higher growth as the investor's money sits near idle in fixed accounts that barely keep up with inflation. So the investor decides he made a mistake and re-enters the market. The market becomes very volatile and the investor rethinks his decision. Now he goes back to fixed income securities with less money than he had before, and buys the same thing he held before for a higher price than he just sold it for.
This may sound like a bumbling investor, but study after study shows that he is probably average; an investor who makes emotional decisions, tries to time the market, or loses sight of his long-term goals. In other words an investor who has forgotten the "Three D's" of investing:
- Diversify: Don't put all your eggs in one basket or your money in one sector. As the economy expands and slows money has a tendency to flow back and forth between equities and fixed instruments. But inside these two markets exists a selection of sectors that also expand and slow with differing rates. This makes the proposition of timing the market even more preposterous since you have to time the smaller sectors against the broader sectors. The solution? Develop a portfolio that invests across a selection of sectors that match your overall accumulation goals with respect to your risk tolerance and time line.
- Dollar Cost Average: Dollar cost averaging is the systematic purchase of investment instruments over time. By buying an equal dollar amount each period, you should end up with a cost basis that is close to the average over that period. This is especially valuable in volatile markets where dramatic swings are experienced and diving in on the wrong day could be a significantly sobering event. However, with any investment program, there are no assurances of success. No investment program can guarantee a profit or protect against a loss in a declining market. And since dollar cost averaging involves continuous investment in securities, you should consider your ability to continue purchases through periods of low prices.
- Discipline: This is the single most important factor in avoiding the before mentioned traps. Although the market moves based on the economy, it can also swing wildly based on psychological reasons such as political turmoil, rumors on interest rate changes, or other world events. If the fundamentals of the economy still match your overall portfolio objectives then you stay the course. This is where the financial professional often becomes the deciding factor between the investor's success or failure to reach his or her goals.
by Christopher Channer
- Get excited about the next "new thing", and then load up on companies who are the early entrants for that theme. This is a trap because it appeals to the common sense of most people. Yet there is little evidence that it works, or that it isconsistent with the nurturing of an investor's healthy mentality. The public doesn't know this, but the "promoters" do, and they are ready to exploit you - a person - even as they are telling you to exploit an "opportunity." (Most of us were taught that it is good to exploit opportunities, but it is wrong to exploit people. Ponder.) Think of the number of "new thing" companies that were born into the tech bubble. A few did well, most did not, and many went bankrupt. Think of biotech, where the next "hot drug" is often supported by very appealing hype. But whom do you know who got rich? When you start hearing people say things like, "This is really going to be big", there is an excellent possibility that they are hoping to drive prices up for their own benefit, rather than to help you find nuggets of gold. This strategy is like many others, which are dependant on investors getting caught up in "the story." This is a mistake. The story must be the result of powerful economic fundamentals, not the other way around.
- Get competitive and make portfolio performance a race. This appeal, which has "mine is bigger than yours" as its driving force, is a child-like approach that is self-defeating. "Beating your neighbor" mentalities, or "beating the index" approaches, serve to take the investor's eye off of their individual risk/reward suitability standards, and regrettable choices are likely to follow. Performance is not a reasonable goal. Performance expectations (reward), are the result of the standards, disciplines, and risk levels that investors set for themselves. If you can keep the risk beneath the level of your discomfort threshold, and the return above the level that is generally associated with that risk, you are a successful investor. The one that should be impressed, with your success or failure, is you. Your neighbors, the indexes, and the media will invite you to be competitive, but truth be told, none of them care much about you, or your results.
- Surrender to Index* investing on the theory that: "If you can't beat them join them". Unmanaged Index* investing certainly has its appeal, given that it appears to be "low cost", and that many investors find it difficult to outperform the major indexes. But index investing can have serious drawbacks for investors because investors are individual human beings; they are not lowest common denominator databases. When investors surrender to this approach they are giving up selectivity, which becomes apparent when they look at the securities that make up a given index and immediately see they will be accepting various companies that they would never buy individually. Investors also give up custom management, which includes suitability needs, tax considerations, social and moral preferences, and appropriate weightings (many indexes are weighted by market capitalization), etc. Most importantly, any attempt to own representative holdings to mirror indexes rather than individual securities also separates investors from the ownership mentality. Rather than functioning with confidence in the "companies" they own parts of, they operate blindly hoping to "rent performance" from advancing markets, via an index. This can lead to the abandonment of investment commitments, and the tendency to "dump and run" when the headlines feel scary. Simply stated, anything that increases the tendency to invest - or divest - based on emotion, is no friend to the real investor.
- Be a shareholder rather than a shareowner. Long-term investor behavior studies (Dalbar ten-year studies) indicate that investors as a group, loose over half of the returns that growth investments actually earn, as a result of heir own erratic behavior. This takes the form of selling too early (or too late), market timing attempts, emotionally driven maneuvers, or loosing faith in the "story" of a security that they thought would be the next big winner. The word shareholder, though it is common terminology, falls far short of the commitment and decision to be an owner. When investors think like owners, they are likely to make better choices. Owners set their standards higher regarding what they commit their capital to, and are far more likely to 'stay the course' when others are loosing faith. Such losses of faith are really the result of a flawed mentality. Had they set the higher standard of ownership, they would have been more capable and confident, and less likely to be a typical - meaning erratic - investor.
- Fail to "assess and adjust." Human nature seems fairly consistent and unchangeable, but the world's circumstances are constantly changing. For example, the prosperity of the nineties produced many changes in attitude. For some, success served to produce lax standards and a false sense of security. That may be the reason that Wall Street has been publicly indicted, humiliated, and let their stewardship standards slip shamelessly. Accordingly, investors must "assess and adjust." We all know that doing things the same way is likely to produce a repetition of results. Therefore, being mistreated by those you trust is not only shameful behavior - it is the reason that the "mistreat me once, shame on you; mistreat me twice, shame on me" rule is appropriate to keep in mind, when certain patterns persist. It is the traditions of Wall Street, fraught with conflicts of interests, biased advise, product creation - which is sold by sales forces that hold themselves out as impartial brokers and advisors - that has produced a self-serving sell-side industry. According to the highest authorities, these folks have repeatedly betrayed the public interest. Therefore, this is an example of where investors must adjust. They must set higher standards. They must not tolerate the traditions of failed stewardship. The must require objectivity, independence, experience, wisdom, investment credentials (not sales skills), honorable behavior and excellent character. The time has come.
- Failing to plan. Good financial planners make a good living because when people are young many fail to see that a good plan in the accumulation years of their investment lives may determine the amount of assets that will be available for their retirement years. But when people mature, it is the investment portfolio that requires the professional plan. Ironically, many investors simply shoot from the hip. They get pushed around from the pressures of life, pressures from well-meaning friends and family, and bad leadership from parts of the media, to say nothing of the ways and traditions of those previously mentioned. Other than getting you to say yes, what is the plan for portfolio success that sales-driven brokers believe in? Or are they too, shooting from the hip. Your plan is really your well understood investment style, assuming you have one. Benefiting from thirty years of experience, and a three generation heritage in the investment business, I believe there is no better portfolio plan than the following:
- Only invest your time and money in companies that are truly the most worthy of your capital, based on measurable historical results.
- Be disciplined about the price you will pay for your portfolio purchases.
- Diversify; never put too many eggs in one basket.
- Rebalance the risk associated with your most successful investments.
- Pay attention to tax consequences.
- Stay the course.
- Re-study this list as a discipline.
To add ...
Discipline is to do what you have planned to do... no matter how wild the market is...
But it is often not easy to do... so practice is required... :)
Let's be frank, 1st thing 1st when you 1st start-out to this financial world of investing - think about money, it's pure honest ! If you can't think money, you can't be creative to achieve your dreams. Do you think The Bank will lend you money, if they know you've not enough 'future' money to repay them (principal + int)..haha! Money is power and power corrupts (All bankers know that)! Therefore, the more you start to think about your money and manage it yourself, the more successful you'll be in the world of investments! Cheers!
Rule number one: Discipline 
Rule number two: more disciplime 
Rule number three: goback to rule number one 
Golden rules of investing
DANIEL BUENAS advises investors not to forget that there is a creed they should live by
Published April 16, 2007
PAY, salaries and jobs - these have been perhaps the hottest topics of discussion in recent weeks.
Every other day we read articles and hear stories of how much some fresh graduate is earning at his new job as investment banker, or how our aunt or uncle made a killing on that high-end property he or she flipped.
And with the stock market soaring to new peaks, some of us must surely be feeling a little left behind as others all around seem to be making money as if gold were falling from the sky. Amidst all this, perhaps now will be a good time to review some of investing's golden rules, as well as to put some perspective to things.
The first thing that any investor should do is to develop an investment plan and strategy. However, while that may be the technical or 'hardware' side of things, one area that many investors forget to nurture is the 'heartware' of investing.
What do I mean by that? Sure, we all need a strategy to investing, but I think every person in general - and an investor specifically - should have a code, or creed, that he or she should subscribe to and live by.
There are no hard and fast rules, but here are some things that you might want to think about:
It's not about the money - really!
Let's be honest - in a society as materialistic as ours, money has become enshrined in our national psyche. This is not uncommon throughout the world, but one must understand that making more money is not a goal in and of itself. Sure, we choose to invest in order to grow our assets and income, but let's not forget that more cash is a conduit to a better life - for ourselves and our family. So if your pursuit for money means sacrificing your relationships, your health or the quality of life, then perhaps you should re-evaluate your circumstances.
And don't think more money will solve all your problems. Assuming you have no prior debt or other obligations, if you can't live within your means on your current salary, it is likely that even if you start to earn more, you will still have problems making ends meet. It is often those with the highest income who fall into the deepest debt.
Money is not just money
An addenda to the above point is that your money is more than a figure in your bank account - it is a tool, a living breathing creature that can be nurtured, grown and put to work. Accumulating more wealth is great, but knowing what to do with it is equally important. This ties in with why it's important to control your spending now, and not later. The effect of compounding means saving $1 today for investment is vastly different from saving $1 five years from now.
Recently, I spoke to a friend who, having just graduated, is already planning to buy a car. With a monthly income of just $2,500, and coming from a relatively humble family, I asked her why she would want to devote such a large part of her income to financing a depreciating asset.
'Why not?' she quipped back. 'I can afford it.'
Well, couple such an attitude with the ready abundance of credit cards and credit facilities - and given the Singaporean proclivity for expensive habits like travelling, buying branded goods, and holding overly lavish weddings - it is no wonder that many young working adults are mirred in debt by their early 30s.
You are in charge of your life - so take charge of it. Now.
OK, this sounds really trite and preachy, but it is true. Unhappy that someone seems to be making more money than you? Then do something about it. It's your life after all! Don't be afraid to fail, and don't let your circumstances hold you back.
Think you should start investing? Good for you. Everybody, should invest - wisely, I may add - so go ahead and do it.
But don't keep saying you want to invest, and never do anything about it. Empower yourself by doing some research, asking for advice (from some one qualified to give it), and then starting to invest. The sooner you start, the better. Just think of it this way: the longer you wait, the less time your money will have to grow, and the lower the long-term rewards.
Don't learn from your family if they're bad examples
This may be harsh, but it is true. Is your family mirred in debt, or making just enough to make ends meet? Figure out why this is the case. Sometimes, it is a matter of circumstance. But it could also be because of poor money management. And while job income does play a part, it is important to note that investing is not just a rich man's game - unless you are in the lowest income brackets, it is possible to save enough to invest on a regular basis.
When it comes to saving for investment, pay yourself first
It's a simple concept really. When you get your first pay cheque, decide how much you can realistically save in liquid assets and for investment. Take into account your monthly liabilities, and see what that adds up to.
For example, you may decide to save 15 per cent of your pay in cash to build up a reserve (most financial advisers recommend six-months in liquid assets), 35 per cent for investment (split into 10 per cent low-risk, 10 per cent medium-risk, and 15 per cent high risk).
The remaining 50 per cent can be used to pay bills and other obligations, as well as for general spending. In that way, you assure your future, instead of squandering it in the present.
In the end, investing is more than just making money. The more philosophically inclined would even say it mirrors the way a person handles life. To succeed, it takes discipline, risk-management and prudent judgement, but there are many rewards to investing carefully and early-on in life. Just don't forget what's really important, and the reasons behind growing your wealth.