The problem with Investment: Greed?

The problem with investment: Greed?

One of the most striking repetitive cycle in the investment world is how people eventually end up buying at high and struggling to sell at low…despite knowing the ultimate guide to successful stock investing: buy low, sell high.

No investors or more suitable to be known as speculators/traders start out to do that but too often, when the stock rally, especially those with a lot of press and media attention, often attract even more buyers. This obviously drove the price up even higher. One thing I learned being in the media industry is that people get excited about what they read and see and want to be part of that action. They end up jumping into a stock that is already trading at a premium – they buy high.

Traders that jump in and out of a stock that’s caught attention; and make a big buck

Too often, we heard stories of great and experienced traders that move in and out of the stock market as swiftly as those we watched in the movie, and make a quick buck. We read about it and we are motivated to be just like them.

The reality is most gurus only talked about the successful stocks

But just like most ordinary traders or investors do, these “gurus” talked about successful stocks that made a 100 or 200% return in a short period of time, but they never shared about those wrong calls they made.

I’m sure there are those out there who have made tonnes of money from stock trading alone but the success rate is definitely not as high as one would imagine.

Most people are probably just like you…talked about the stock market when it’s hot, and decided to talk about cars and property investment when the stock market become laggard. 

If you haven’t realize, not a lot of people have been talking about investing in the stock market at the end of last year, or if those who have been talking about how cheap the banking stocks are back in Dec last year, are most likely only buying it in Feb or beginning of March this year.

When the stock market turns cold?

When the stock market fall or crash, most investors may want to sell along with the rest of the market. If you go by price alone, this can lead to the next bad decision: Sell Low.

The argument to sell in a bad market makes sense in a way…you wouldn’t want to be holding those counters when the market is bad because it could go worse, so you sell it, thinking that you will be able to buy it when it goes lower. The problem is: most people don’t really buy when it’s low, because it’s almost too scary to buy at low, not knowing if it’s the lowest.

There are many reasons for a stock price to go up or drops and most of them have nothing to do with the soundness of investment.

And here is where the problem in investment lies: GREED

Because everyone wanted to make a quick buck from investment, everyone is trying to buy at low and sell at high, but it is this very nature that turn a speculator or trader to buy when the market is running bullish and sell when it’s bearish.

“Greed is good”, the famous saying from the movie, Wall Street (1987), speaks of most of us today one way or the other. If you are investing in the stock market because of a company that you like either due to its branding, its financial results or the nature of its business, it probably makes better sense than to buy into one than to just based on an expectation of it to go up by another 50% the next two weeks.

Looking into the stock price alone is all the more likely to make you buying at high and selling at low.

FBMKLCI and Bursa Malaysia stock exchange volume (31 Mar 2016 - 31 Mar 2017)

As of the first quarter in 2017, the Malaysian stock market has surged and on a good run. I’m sure more people will buy in during the good days, most people making money at this time, but you never know when things will go sour.

A quick look at the chart above. The numbers in red is the average volume for every quarter from Mar 31, 2016 to Mar 31, 2017. And it's very obvious that when the share price is at its higher end/peak, where more activities are seen in the Bursa exchange...because there's when greed kicks in, when the optimism and feel good factor is there, so that's when most people buy (buying at high). And similarly, when the market is bad, the trading volume fall significantly, because there's when greed creeps in and investors/speculators/traders decided to sell.

In the 2Q2016 (Mar 31 to Jun 30, 2016), the average volume for the Bursa exchange was at 1.65 bil shares. During this time, the market has been on a downtrend. Similar trend was seen in the 4Q2016 (Oct to Dec 2016), when the average volume was at 1.43 billion shares. Similarly, at this time, the market was pretty negative with most analysts and market experts giving a cautious market outlook. But that has changed in the recently passed 1Q2017 where the average volume was at 2.71 billion shares. During this time, the index has surpassed the 1,700 index approaching 1,750 index. Well, in short, investors tend to buy at a high. 

Just look at the sketch below...looks exactly like what you see on the Malaysia market exchange. 

Here’s what I wrote at The Edge:

To put it into perspective, out of the 925 companies listed on Bursa Malaysia, 79.2% or 733 companies have seen their share prices heading north. Meanwhile, 17.1% or 158 companies’ share prices have drifted lower. The remaining 34 companies or 3.7% remained unchanged.

Of those stocks that have climbed, about 480 or more than 50% of the listed companies have jumped by a double-digit growth.

In other words, for every 10 stocks invested in, you would have about five of them growing double digits, another three gaining by less than 10% with the remaining two counters heading south.

While it feels good when things are going your way in the market, will you be caught wondering if the music may soon stop?