Retail investors always end up buying at the wrong time! Or another way to put it is, retailers end up buying stocks at a much higher price taking up a much bigger risk. But why does that happen? Why do retail investors end up buying at the wrong time? First, let’s understand what is the right or wrong time to buy stock in the market.
How is money made in the market?
The right time to buy a stock can be defined by understanding how money is made in the market. Every single investor & trader has made his/her fortune in the market by a simple mantra – “Buy low, sell high”. Whether you are an investor buying stocks for the longer term or you are a trader who is involved in short term trades, this statement of “Buy low, sell high” applies to you. Even traders who make their money by shorting the market also follow the same, only difference is that they first sell high & then follow it up with buy low.
So, it is quite clear that money is made in the stock market by buying stock at a low price. But when does the stock market provide an opportunity to buy stock at a low price? Well, the most logical place to buy stocks should be the bottom of the market, right?
Should you buy at the exact bottom?
No, you should not buy at the exact bottom of the market. Because nobody knows the exact bottom of the market. Visit this article – Can anyone predict the stock market? The bottom of the stock market is often created by the biggest players who have the biggest funds in the world. It is clearly impossible for a retail investor to figure out the exact bottom of the market. Anyone who claims to buy the bottom is simply a lucky fool who was at the right place at the right time (by luck).
What is the best opportunity to ‘buy low’?
Stock market corrections (or crashes) are a time where the sentiments are at an all time low & therefore most stocks are available at a heavy discount. These provide good opportunities where retail investors can start accumulating good stocks at a low price. However, retail investors should not put every penny in the stock market during the crash. This is because nobody can predict the bottom of the market. Stocks can head lower even if all the indicators in the world are showing that the stocks are oversold & undervalued at the current price. What if you think that the stock market has bottomed out, but the market starts heading lower? Please note, corrections and crashes which happen in the entire index always recover, the same might not be true for individual stocks.
The best method for retail investors is to wait for the markets to consolidate & start recovering after the correction. This recovery confirms that the big players (who have the power to move the markets) are interested in buying again. This is the time where investors can start accumulating good stocks to build his/her long term portfolio.
Let the market speak out its intentions, do not try to predict the outcome!
The problem with retailers – recency bias!
The biggest problem which retailers face is the recency bias. Do you ever have that feeling that the stock markets will never fall after a huge rally? Or that the markets will never rise after a massive fall? These are examples of recency bias, where investors think that whatever has been happening recently, will continue to happen in the future. Investors are unable to adapt when the market changes direction because they are always looking for the same thing to continue.
This is why retailers do not buy during the market crashes & always end up buying at the highs! They think that the crash will never stop during a market crash & the rally will never stop during a bull run. However, the markets always turn from bullish to bearish sentiments & vice versa every now & then. This is the time where investors need to adapt with the market & not be blinded by their recency bias.
What is the exact wrong time to buy stocks?
The exact time to buy the stocks is when the markets have been rallying since a long time. Retail investors think that the current rally will continue forever & end up buying at the exact wrong time when the stock prices are sky high. Even if the investor has to buy during an uptrend, the investors should wait for the market to pullback & provide a ‘discount’ so that the investor can safely buy the stock. Pullbacks are very frequent in the stock market for a simple reason, whoever has bought the rally has to sell somewhere! Always remember, stocks never move in a straight line. To learn more, visit this article – Why stocks never move in a straight line?
Why retailers buy stocks at the wrong time?
Retailers buy stocks at the wrong time due to the following reasons :
- Too scared to buy during the market crash / Worried that the markets will never stop falling (correction)
- Too happy during the market rally / Worried that the markets will never stop rallying (bull run)
- Not looking for a discount in the market.
- Chasing the market
- Trying to find the exact bottom of the stock market
Conclusion
Retail investors miss out on good opportunities to buy stocks during the market crashes. You should be aware that the markets never move in a straight line, there will always be pullbacks during a rally, recovery after crashes, consolidation after corrections, etc. This will allow investors to make better decisions for their investment journey. However, the final decision of investing depends entirely upon the reader.
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Great info.