You’re redecorating the dining room and you’ve found the perfect rug. It’s $1,500 at a high-end store downtown. Yet when you pop into HomeSense for some cocktail napkins, you see the identical rug – or is it? – for a mere $500. The differences are imperceptible, but it can’t be as good, right? Surely, the extra thou would confer a softer feel, greater durability? You find yourself about to willingly pay three times the amount necessary, because of a nagging conviction that… you get what you pay for.
But do you, ever, really, get what you pay for?
Value investors hunt for deals. They buy stocks underpriced relative to their intrinsic value or at a discount to their usual highs. They study company fundamentals to be certain of financial health and prospects. Momentum investors buy stocks on a rising price trajectory. They use trends and volume to identify equities on the move. And then there are FOMO investors.
When the price of a stock you’d like to own drops, do you scoop it up “on sale”? Or wait, fearing that it must now be flawed? Do you watch your coveted stock hit new all-time highs, and become seized with Fear Of Missing Out (FOMO)? Do you buy it at the top of its range, only to watch your investment sink and linger in the red? Do you lose patience and sell for a loss, whereupon the stock maddeningly rises again?
Buying low and selling high sounds so simple and eludes so many. According to The New York Times, “Mutual fund investors allocated more than $300 billion in new cash to equity funds in the bull market of 2002 to 2007 — with much of it put into funds when the market was near its highs. But in the ensuing bear market, investors pulled out more than $150 billion of assets — with the bulk of the withdrawals after the market melted down in September .”
The reason we buy high and sell low, is fear and short-term thinking. When balances plummet— as they did in December 2018— panic ensues and many investors want only to stop the damage. Yet when markets hit all-time highs, you see your cash wasting time on the sidelines, and want to put it to work. If only we had the temerity to abide by the words of Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful.”
With some things in life, you really can project the results you want. “Expensive Placebos Work Better,” is the revealing title of an article written by Derek Lowe in ScienceMag.org. The author describes a study among Parkinson’s patients, wherein half the patients received a ‘drug’ they were told cost $100 per dose, while the other half were told their doses cost $1,500 each. In both cases, the ‘drug’ was saline. Both sets of patients experienced the placebo effect. Yet those who thought they were taking the more expensive version “were amazed at the extent of the difference brought about by their expectations”. As the author goes on to say, “If you tell people they’re drinking expensive wine, they report that it tastes better than the cheap stuff, even though they both came from the same bottle.”
Of course, what might work for wine, drugs or rugs, sadly won’t work for stocks. There’s a strong and direct relationship between your enjoyment of a stock and its price appreciation since you bought it. You don’t need to buy at the lowest point of all time, nor do you need to sell at the highest point of all time. But buying lower and selling higher would be a great step in the right direction.