Profit = sell price – buy price.
Every investor dreams of making great profit by buying low and selling high. But many often fall into the trap of doing the opposite. This is because when prices are high and going north, it is easy to assume that it will continue in the same path. And this optimism and overconfidence is usually why people make irrational choices of investing at a high.
Similarly, pessimism due to suppressed prices often results in neglect of potentially good investment. To be fair, it is tough to make a call when situation is gloomy and grey.
One example would be the dot com bubble in the late 90s-00s. The return for NASDAQ in 1999 alone was over 85%. Yet, investors were still pouring money into the market then – just in time for the crash when interest rates went up and when companies did not seem like they could sustain the period. No one expected this until it happened. And it did not seem possible until it did.
Another more recent example would be Gold and when prices hit 1900. This episode also allowed me to experience first-hand that emotions affect judgement and it can affect anyone- even my most savvy clients made the same mistake. After all, when your banker, friends, neighbours and colleagues are all saying the same thing, then it is easy to believe that it’s true.
so the next time you are about to make an investment, ask yourself this: “is it expensive?”
CFP, representing Financial Alliance 