Buying high and selling low may sound counterintuitive, however, the relative strength strategy demonstrates buying stronger companies and selling relatively weaker performers may result in a positive return. This article isn’t about relative strength strategy but about the behavioural cycle investors tend to make when trying to beat the market, I.E buy low, sell high. Investors beginning their long-term investment strategy tend to think first to try to outsmart the market by buying low and selling high.

The Psychology Behind Buying High and Selling Low

Investors often find themselves conflicted when faced with record-high stock prices. While they may feel pleased about the increasing value of their existing equity holdings, there is also apprehension that such highs might signal an impending downturn. Many investors are driven by emotions such as fear and greed, which can lead to impulsive decisions. When a stock is performing well and attracting attention, the fear of missing out (FOMO) compels investors to jump in at inflated prices. Conversely, when prices drop, fear takes over, causing them to panic-sell, often at a loss.

Financial journalists frequently exacerbate this anxiety, suggesting that market dynamics follow a physical law where what goes up must come down. Headlines from outlets like the Wall Street Journal and Barron’s echo this sentiment, leading many to shy away from investing at peak levels. However, it’s important to remember that stocks represent the company’s balance sheet, driven by countless business managers striving for profitable returns.

Historical evidence suggests that investors can be rewarded for their capital contributions, regardless of market highs or lows. The current share price reflects the collective judgment of future earnings, and stocks are continuously priced to ensure a positive expected return for investors. Rather than viewing record-high prices with excitement or fear, investors should approach them with indifference. Frequent new highs are expected if stocks have a positive return.

Data shows that purchasing shares at all-time highs can yield returns comparable to buying after declines, demonstrating that market timing based on price levels alone may not be as critical as it seems.

Monkey Business: Breeding the next stock-pickers

“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

This was written by Burton Malkiel in his 1973 book “A Random Walk on Wall Street.”. Do you think you would beat a monkey at stockpicking? There have been real-life cases, such as a cat named Orlando gaining attention in 2012 after narrowly defeating a group of investors over a year. Orlando dropped a toy mouse on a grid of numbers assigned to various businesses to make its “trading decisions.” The outcome? The investment experts made £5,176, while the cat made £5,542 out of £5,000.

Another ludicrous case involved Austrian concept artist Michael Marcovici, who claimed to have a 57% accuracy rate in breeding and teaching “rat traders” with names like Morgan Kleinsworth and Mr. Lehmann.

A team who published a paper at with ‘Research Affiliates LLC’ wanted to test Malkiel’s quote and created an evenly weighted index by randomly choosing 30 equities from the top 1000 stocks by market capitalisation, simulating a monkey’s selections rather than actually managing one. The average returns from 1964 to 2012 were compared after the identical procedure was carried out 100 times.

A monkey would perform as well as mutual funds, according to Burton Malkiel. He was mistaken. The monkey outperformed the market ninety-six times! Given that a monkey could outperform many expert stock pickers, why complicate things? It might be simpler and more effective to just invest in the market.

An unstated fact, however, is that most animal prophets who choose stocks would not be in the headlines because they are unsuccessful. There are amusing anecdotes, but is there more to this than that?

Even a broken clock is right twice a day.

Common Behavioral Pitfalls: Why We Struggle to Buy Low and Sell High

Investors often fall victim to several behavioural pitfalls that hinder their ability to buy low and sell high. One major issue is loss aversion, where the pain of losing money weighs heavier than the joy of making gains. This leads to holding onto losing investments in hopes of a turnaround while prematurely selling winners out of fear that they might decline.

Additionally, the herd mentality encourages investors to follow the crowd, buying when everyone else is buying and selling during market downturns. These behaviours create a pattern where emotional reactions override rational decision-making, ultimately compromising investment success.

Strategies for Overcoming Emotional Biases in Investing

To break free from these emotional traps, investors can adopt several strategies. First, establishing a well-defined financial plan and sticking to it can provide a framework for making decisions based on logic rather than emotion. Rebalancing portfolios helps maintain discipline, ensuring that your investments align with your long-term financial goals.

Seeking guidance from fiduciary, financial advisors can provide objective insights on the above, helping investors navigate market noise and make informed decisions that align with their financial objectives. Learn more about what a fiduciary financial advisor is here.