Thursday, September 30, 2010

Buy high, sell low

A contrarian strategy ("the average investor is stupid") would have paid off pretty well over the last decade. Ah, the wisdom of markets :-)

WSJ: [A recent research report] calculates that mutual fund investors [over the last decade] bought into the Standard & Poor's 500-stock index at an average of 1,434. That's close to its record high of 1,565. If investors had invested at random times instead, their average purchase price would have been 1,171. [Note an actual contrarian strategy would have performed better than random buying.]

... Human beings are hard-wired to run with the herd. For millions of years, when the herd stampeded, the smartest move wasn't the hang around and wait to see why. It was to run.

And that's how they act on the stock market as well. But when it comes to investing, it's a bad idea. Your feelings are a bad guide. And there is no safety in numbers.

I am frequently surprised at how many people still give in to their instincts in these matters. During the housing boom, anything I wrote questioning house prices automatically drew scathing reactions. ...


ABCD said...

How could this be? This data runs contrary to the EMH, which our Lord, our Savior, Alan Greenspan had ordained that Wall Street follow.

Idiot said...

You could also argue that understanding the movement, investment patterns of crowds is far more clever than anticipating on the markets themselves, which ultimately, as we all know, depend more on people than "fundamentals". Hence, understanding your neighbour might well play in your financial success... Just a guess.

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