The Secret to Successful Investing

by Apr 9, 2020Personal Finance

Investing is the easiest thing on earth: buy low and sell high.

It doesn’t matter if you buy stocks, bonds, gold coins, bitcoins, Beanie Babies, collectible cars, houses or vet hospitals.

Buy low and sell high. Easy right?

Well, if it were truly that easy, everybody would be rich and would retire at 35.

Why do only the happy few reach that goal?
Because of the darn organ that lives between your ears…

A classic graph called “The cycle of investor emotions” has been published and copied multiple times over several decades (translation: we don’t know the actual source). It is worth studying and understanding.

An updated version, modernized with emojis and aptly called “The cycle of market emojis’, piqued our interest (this one is borrowed from Forbes, July 2018).

So all we have to do to succeed is go “full in” at the lowest point of the graph, despite the “Anger” or “Depression”. In other graphs, the lowest point is called “Capitulation” or “Despondency”.

Of course, the problem is that you can never know exactly when that is.

As the quote goes, “Markets can go much higher than you think, and they can go much lower than you can imagine.”

So how can you tell?

Generations of investors and financial gurus have tried to identify the signs… Entire books have been written… Complete theories have been invented… Yet it’s far from an exact science.

The natural cycle

In a strong economy, with a strong market, people are optimistic. So they tend to invest. They’re excited. Investing is thrilling, because almost everything you buy goes up (hence the classic analogy with a monkey throwing darts at a stock chart). This euphoria leads to complacency.

The cruel irony is that when most people are complacent and comfortable with their investing strategy, they are near the “Point of maximum financial risk.” They just don’t know it yet.

At the first sign of market trouble, anxiety sets in… Then denial. Our brains simply can’t accept that this could be the end of the bull market. Things were going so well! We think “it’s just a natural reset”, “This too shall pass”, “I’m in it for the long run”, or “I can stomach this, I’m not selling”.

Yet as the market continues to tank, fear sets in… Fear leads to panic selling… at the worst possible time…

People start to get angry. “How can I possibly have lost so much money?” “Why didn’t XYZ (my advisor, my accountant, my financial newsletter…) prevent me from such a painful financial loss?”

Then people become depressed. “How am I ever going to retire?” “How am I going to get back in the black?” “How will I ever overcome this?” “How can I recover from this?”

The cruel irony is that when most people are angry and depressed, they are willing to throw in the towel. They swear they don’t want anything to do with investing ever again. They don’t even want to look at their brokerage account or statement. They are plain disgusted.

In reality, they are at the “Point of maximum financial opportunity.” They just don’t know it yet.

At the point of absolute maximum pessimism, there’s only one direction left to go: up.

The few who have the guts to get back in the market begin to have hope in the future. They see the light at the end of the financial tunnel. They feel relief as their portfolio slowly (or quickly) starts looking good again.
They are finally optimistic about the future… and the never-ending cycle continues.

So where are we now?

Of course, there is no way to know the answer to this burning question with certainty.

We can only answer it in hindsight – and therein lies the rub…

So what’s an investor to do?

It’s OK if you don’t buy at the very lowest and if you don’t sell at the very highest point of the curve.

Not only is it OK. It’s actually impossible, at least consistently.

Knowing what the market repeatedly does can help you decide when to get back into the market. You may be a bit early or a bit late, but in the long run, it’s perfectly acceptable.

Mind your stops. Be disciplined. Don’t be (too) greedy. Consider going back in progressively rather than all at once.

Investing is an emotional rollercoaster.

It can be thrilling. Or it can be nauseating.

Yet you can ditch the Pepcid if you understand the basic principles above.

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit