Is the time of maximum pessimism the best time to buy stocks?
The markets are very bearish. Stocks have gone down sharply both in Singapore and the US due to a multitude of reasons. Commodities have dropped to unbelievably low levels as well. There doesn’t seem to be even an inkling of good news anywhere.
There is a saying by Warren Buffet “when people are fearful be greedy. When people are greedy be fearful.” Or when the masses are selling buy and when the masses are buying sell. So in this time of worry and fear should you be buying into stocks??
After many years of investing and trading I’ve personally noticed some things in the markets. Many of us especially the newbies tend to get very excited especially when there are mini crashes.
This was what happened to me very recently. When there was the oil price plunge which started in end 2014. I decided to buy into oil after a few months as I was very excited. I had never seen oil go to $60/barrel before. I was very excited as I knew it was a very good price.
However the price kept sliding up to a low of $37 in August!! It was a ridiculously low price!
Even more recently the Straits Times Index has been dropping sharply week after week. Many believed we reached a “bottom” or a critical support at 2800. However prices plunged through that support to be at 2799 as of 1 October 2015.
Many over eager investors would get their hands burned.
But the saying goes “when people are fearful be greedy. When people are greedy be fearful.”?!?!
It’s easier said than done and most certainly very difficult to put to action.
First we must understand this saying in the markets. “The bulls climb up the stairs whereas the bears fall out the window”
What exactly does that mean? When prices go up it takes time and goes up slowly whereas when prices are falling they PLUNGE and fall right out the window.
This phenomenon is easily explained by human sentiment.
When fear sets in people panic really fast. At the first sign of trouble people panic and run. Conversely confidence takes time to build. People don’t get confident and sure of themselves very quickly. It takes time.
We really should understand this simple principle to make money in the markets.
I’d like to go against what warren buffet said and say when people are selling DO NOT BUY! Do not be over eager to go right into a stock and buy.
It is a terrible and possibly costly mistake to buy right into a black candle. In trading terms it is referred to as “catching a falling knife”
When you catch a knife you will bleed! If you remember, prices take time to slowly climb up.
Wait patiently and look for signs of prices picking back up again before you enter. Even then make sure you buy a smaller amount instead of going all in. As the price slowly recovers you might consider adding more into the position. This is how I personally do it.
Position sizing and understanding trends is fundamental for you to achieve success in the markets. If you are more skilled you can see signs beforehand.
Do learn from my mistake and not be over eager especially in this down trending market. As for now I am sitting on the sidelines waiting to pounce. But just like an expert predator I will wait patiently for my moment to strike.
P.S. if you want to learn how to be the expert in analysing charting patterns so that you can identify a uptrend even before the masses you can click HERE. My partner CK Lye who has been trading for over 10 years now will share his wealth of experience and teach specific signals he looks out for to show him the tell tale signs in the market. click HERE