Which of these should investors do:
A. Buy low, sell high (i.e., make a profit)
B. Buy high, sell low (i.e., losing money)
We all know that “A” is the right answer to the first question. But what retail investors actually do opposite of this. They got trap with stories that keep on floating in various media, the hot Tips, easy money.
Unfortunately, investing isn’t natural. If other people like an investment, the price goes up. If the price goes up, all things being equal, you’re buying high—which is like putting money in a big pile and burning it. Yes, there are many nuances here, like the fact that other people might drive the price up even more after you buy it (aka the “greater fool” theory). But putting aside the nuances and our innate temptation to try and outsmart everyone else in the world, that’s one small part of the crazy logic of investing.
Who Cares?
So, investing is a bit crazy. Why does that matter? It matters because if we do what feels natural if we don’t understand the crazy world of investing, we can lose our money. This doesn’t mean that we might “miss out” on a hypothetical future gain we might have had. It could be much more serious than that—it may mean failing to reach our goals.
Investing is fascinating, and it’s often exciting and fun. But we can’t ignore the dark underside. Investments are always risky, and there’s always the chance of losing out. But, one of the big factors that make investments risky is our own behavior as investors. In a study, investors who actively traded stocks in the market made mistakes again and again—and had returns that were one-third lower than that of average return. Even investors who have invested in mutual funds have similar challenges—losing up to 3-9 % of returns on average (some are better, some are worse).
As Ben Graham , said in The Intelligent Investor: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
A study from Morningstar Guide to Help Investors.