Buy Low, Sell High

The most basic and well known investing phrase. It seems so simple. You want to buy the stuff at the low point and sell at the high point so you can cement your returns and make money. It's basic and makes sense. Ya know, the goal of investing.

The problem is that most people aren't exceptional investors.
We are average and tend to move with the pack. Myself and others I presume would like to think that we would never get caught up in the hype of a bubble, like that of 2000, but many people did. Even those who saw the collapse coming couldn't predict when it would happen. As the days and weeks went on and their friends were pulling 25% returns out of their ass while they themselves have been making 7% it makes it hard to stay out.


There were some folks who saw the collapse of tech back in 2000. Power to them because so many people missed it. However, not all of them had the will power to stay OUT of the market during the upward trend. The period of good was so exceptional that the people who were right weren't able to stay out of the market due in large part to comparing themselves to their peers. Their ego. It is hard to see yourself perform worse than nearly everyone. The people who succumbed didn't have control.


Buying low and selling high is the most basic and important aspect to investing. Having control over ego can help save yourself from following the crowd. In the case of the tech bubble, the crowd was running itself off a cliff. Obviously there are other things that go into investing. Don't misunderstand this as trying to oversimplify investing. It isn't simple. As Charlie Munger says, "It's not supposed to be easy. Anyone who finds it easy is stupid."  


Buy low. Sell high. Where does that leave us now? Is the market hot? Overbought? Too expensive? Or has it cooled down and displaying some bargains? Those questions are hard to answer without intrinsic value. What you believe the price of an asset to be. There are different ways to come to a price and it all depends on preference. It's something you need to develop on your own - find what works for you - because what works for one guy might not make sense to another.


One could try and answer it based on overall thoughts on what the average investor thinks. And then do the opposite. I am a firm believer that the market is not efficient. If you're reading this then I feel confident neither do you. Which means that depending how investors act, bargains and underpricing/overpricing exists. I spoke about the herd before. If the overarching feelings about the market are positive - you hear about stock picks at cocktail parties, baseball games, parties, places where stock picking is not normal - one could argue the market is too hot and there are too many buyers forcing the prices up to unsustainable levels. If that's the case, sell and short sell is the move. If you go with that type of strategy - contrarian - you need to have confidence in your knowledge and stick to your guns. Refer back to the people who got it right with the tech bubble but couldn't resist the profits and ultimately got pummeled in the cliff dive.


Opposite this brings me to the 2007-08 example. I'm young so it had little impact on me as I had no idea what was going on. I was a freshman in high school and an was busy being a stupid 14 year old. But, 2007-08 was the worst recession the country had seen since the 1980's and many were worried the whole banking system would fail. It was stupid easy to borrow money. Banks were lending at all time lows and people were borrowing at all time highs. Leverage was king. And guess what lead to the demise of so many investors? Cheap money. Leverage. At the end of 2008 and into 2009, people were convinced the world would end. The banking system in the United States was on the brink of failing and thus the world banking system was next. 


It was basically forced into our minds that things would be bad for a long time. Nearly everyone had a pessimistic view of the future. Howard Marks talks about the market acting as a pendulum. Nothing can go on forever. Markets have been cyclical for as long as they have existed and eventually they will go back to average. It doesn't stay normal for long until it starts swinging to the next extreme. In 2008, the pendulum was about as extreme as it got. People were convinced it would stay bad for years. However, like Marks says, the market started to swing back to normal and to the next extreme. 2009 saw record returns for most investment vehicles and hardly anyone predicted it. 


The point you ask? Buy. Low. The future is scary and many people were forced to sell due to margin calls (leverage). The exceptional investors, the folks with a second level of thinking, were able to realize that the pessimism was overstated and knew to buy the bargains. Recessions are bad, no doubt about it. Corrections suck, no doubt about it. For the strong willed though, they lead to returns on stocks that are at bargain prices and undervalued.