Iceberg Investors
Posted by John Draper | Filed under Investing
If you’re watching the markets dip and dive, pirouette and plummet, you might be feeling a little queasy. Not a surprise, really, since most people who have invested money have very little idea how the various investments work. Sure, they know what the salesperson told them, but they don’t understand the really deep stuff. And so, when the markets start to take a tumble, panic is the name of the game.
If you’re an Iceberg Investor – you buy investments based on what you can see above the water, but have not a clue about the stuff below the surface. Most of us are Iceberg Investors. We buy based on what we hear in the news, from our friends, from our advisors. But we don’t fundamentally understand the investments and what’s in ‘em.
Sadly, there are a lot of salespeople out there who also don’t understand what’s in the investments they are selling. They have an idea. They know it probably good. They want to stay on the right side of their boss. But they couldn’t explain to you what it is, how it works, or what’ll affect it. And they probably aren’t buying it.
Panic only hurts the panicked. Regardless of what you bought, and why, here are several reasons why you don’t want to make like a chicken with its head cut off.
Ever hear the phrase, “Buy low and sell high”? Then you know now is not the time to sell since everyone else is dumping their investments and this would be Buy Low Time. Below the Surface Investors get nervous when the market is at an All Time High. Hey, that probably means DOWN is the next place to go, right? But when the market is off its peak, it’s pretty reasonable to assume that there some UP room.
The next very best reason to not sell is that nothing happens until you do. That’s right. As long as you’re holding the investment, it could go up again and then you’d have no (or less) loss. You don’t actually lose a cent until you execute your sell order and turn your panic into loss. So don’t.
Active trading is also a sure way to decrease your investments’ performance. Remember your investment objectives? They should have been long-term in nature (because no body is supposed to be in the market with an investment horizon of less than 10 years.) Why change your strategy now? Market timing doesn’t work… all the experts say so. And time in the market trumps market timing every time. So relax. Stay focused on your objectives.
If the market feels riskier than it ever has, it’s your imagination. In reality, the most risky time to get into the market is when there hasn’t been a correction for a long time and everyone believes there’s no where to go but up. That kind of “unbridled enthusiasm” is a sure signal that things are about to change. It’s time to take the emotion out of the investing. Never mind what your gut is telling you about risk. It’s wrong. It’s just emotion. Invest with your head.
And do your homework. When you buy the shares of a company, don’t do it based on past performance since you’ve already missed out on that growth. Instead, buy companies that you understand and like as a consumer. If you don’t want to put in the work, look for “passive portfolios”… you can head over to Canadian Capitalist to learn more about them.
And for heaven’s sake, don’t listen to the “market makers.” As Warren Buffet says, “Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.” Let’s face it, all those guys giving out the free advice wouldn’t need JOBS if they were really as smart about investing as people would like to believe they are.
Bookmark: del.icio.us Digg StumbleUpon
October 20, 2008 at 6:55 am
Hi Gail:
Good comments about the ups/downs of the Marketplace. My husband coined the phrase, “Share the Fear.” A lot of what’s behind the panic in today’s markets are based on sharing the fear – and the greed. So like Gail suggests – stand back and use your methodical thinking brain to ride out the ups/downs in the longrun.
October 20, 2008 at 8:10 am
Another great post, Gail. Before 9/11, I bought shares in Bombardier Aerospace, because I like them, and they had great prospects, in both airplanes, and railway. Well, as we know, any stock airplane oriented dropped like a stone after that. So, yes, I did “lose” money, however, I put money in the stock that I knew I could lose if I had to, and it’s still in there. So, I could still make my money back. Like you said, it’s not gone until I sell it, so there it sits. I haven’t done any other risky stocks, I have mostly mutual funds in various types. I look at the facts that the markets always go up and down, and not to panic looking at them now. They will go back up – just a matter of time. And I have time before I need to think of selling them. Thanks for pointing that out to us!
October 20, 2008 at 10:20 am
Excellent advice Gail. I’m happy to say that we’re following it. My hubby was a “financial adviser” for a while, but he had to leave that game when he realized it was all about sales. He got in with an altruistic belief that he was helping people… and he was… but his bosses were pushing for him to “sell the product” and he didn’t like it.
But we’re not panicked. We’re just holding on and continuing with the plan. We know where are stocks are at, but we’re making a conscious decision to hold, not fold.
October 20, 2008 at 1:13 pm
YAY!!!
I was trying to talk to my husband about this very subject the other day.
He was panicking and saying he wanted to buy gold instead (buy high). I told him that was being rash and needed to think anout it more logically. I told hime “buy low, sell high” is the truth for successful gains, and I told him if we sold now we would be guaranteed to lose, but if we hung on then we’d have a chance to catch the inevitable rebound — after all we are about 30 years from retiring!!!! I went one step arther and told him we were going to double our monthly contributions while the market is low…. “Hey the stockmarket is on SALE!” I told him. We can afford to do that for now, so why not take advantage of the downturn?
He came around, and though he is still sweating bullets, he can see my reasoning… I have read TONS of books on smart money (yours included Gail) and NONE of them say selling low is the road to wealth. LOL
October 20, 2008 at 1:43 pm
The term some are looking for is ‘contrarian investing’. It seems to be based on the ‘buy low, sell high’ concept. Buy when people are getting rid of good stuff (low demand and high offer) and sell when people want it (low offer and high demand). So buy when people are getting out and sell when people are getting in.
What’s been shown before: if you follow the crowd in a panic, you will be a bad as everybody else.
LONG TERM INVESTING. BUY AND HOLD. Research what you buy. STOCK MARKET!
Short term investing in the stock market can lead to great loss.
So when to sell?
- Why did you invest in the stock market? Make money!
- If you sell today, will you make money? If no, don’t sell (unless you have another good reason); if you do make money, selling could be a good idea.
Financial decisions (inluding budgeting): What is the goal and is it met?
October 20, 2008 at 2:16 pm
Warren Buffet has a great saying: “Be fearful when others are greedy, and be greedy when others are fearful.” And he’s said that he’s never seen as much fear in the markets as now. And hey, he’s buying not selling and I think he knows a thing or two. Good post Gail, reminding everyone to be rationale, and the difference between paper gains and paper losses.
October 20, 2008 at 3:02 pm
When people talk about short vs long term investing they often forget that it depends on what type of the investment it is and what the goals of the investment are. Long term investments are not categorically superior. At this particular time, you also have to weigh the benefit of holding, vs cutting your losses and putting your money elsewhere. It depends on your personal portfolio, but then again, no matter how much you know, it’s a tough game to win.
October 20, 2008 at 3:02 pm
Thanks for the mention Gail. I should clarify that Gail’s point here is about stock markets as a whole, not individual stocks. As long as our economy grows and free enterprise thrives, our corporations will increase their earnings and it will eventually be reflected in our stock markets. As for individual stocks, the quality names will rebound along with the market; low-quality ones may never come back. It is up to the investor to do the research. Nortel is never coming back to $100.
October 20, 2008 at 7:39 pm
well timed post. my stomach flips when i look at my statements. we had been thinking of selling earlier this year as we aren’t too comfy with mutuals and the market but have em anyways, but now we are in it for the long term.
when we called our investor guy (as many people did a few weeks back), we asked him when exactly would he tell us to bail. he told us the only time he would ever tell us to sell was when our portfolio had double. no other time, no exception.
makes sense. still a little queezy though.
October 22, 2008 at 11:28 pm
You might be interested in reading the October 16 New York Times article by Warren Buffet on this very subject:
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&partner=rssuserland&emc=rss&pagewanted=all&oref=slogin
My favorite quote from the article: “In short, bad news is an investor’s best friend.”
Gail Bebee
Author of No Hype-The Straight Goods on Investing Your Money