Why do we Buy high and Sell low?

Buying High and Selling Low

We don’t have to look too far to see evidence of poor investor behavior on a wide scale. In 1999 when the dot-com bubble got bigger and bigger, the NASDAQ was up over 85 percent…FOR THE YEAR. That was crazy enough, but what happened in the first quarter of 2000 was insane. We went on a buying binge, all of us. Up until January 2000, the record for net inflows (money going in, minus money going out) into stock mutual funds was $29 billion. Now here we are in January 2000, right after an 86 percent run up. Look at these numbers.

In January we invested $44.5 billion into stock mutual funds.

In February, the shortest month of the year, inflows hit $55.6 billion.

And March was nothing to laugh at either with an investment of another $39.9 billion.

Over three months, $140 billion dollars entered the market, after it already had gained over 80 percent. At a time when we should have shown some caution, we allowed ourselves to get swept along with the crowd, and we paid for it. March 24, 2000, was the peak of the dot-com bubble, and by October 2002 the market had lost 50 percent of its value. So we poured money in, just in time to take a major loss!

If the behavior at the top was wild, clearly we still hadn’t learned the lesson on the way down. With the S&P 500 down over 50 percent from its highs, we couldn’t get out fast enough. October marked the fifth month in a row that investors pulled more money out of stock mutual funds than they invested. That had never happened. And I mean never. October turned out to be the market low. So at the market low, instead of buying equities at the best “sale” prices in five years, investors moved their money into bond funds, making the mistake of having bought high and sold low. Bond funds experienced a record inflow of $140 billion in 2002, at a time when bonds where at 46 year highs.

How many of us became a real estate investor in 2006? See the pattern.