How to Buy Stocks and the Herd Mentality
When the stock mat moves in one direction or another, there are conflicting ideas about what you, the individual investor, should do in response.
The old adage that you should always buy when others are selling - and vice versa - is a good first principle, but what about those times when the fundamentals of the companies being bought or sold don't justify following that adage? For those just learning how to buy stocks, the mentality of the herd can easily take hold and cast rational thought out the window.
Massive selloffs always drive down stock prices, which should generate bargains provided that the underlying fundamentals of the company are sound.
Yet, many investors apparently don't understand how to buy stocks with a "buy low, sell high" method.
In fact, in nearly every market downturn, you see hordes of investors rushing to sell everything they own.
The flaw in that approach is that they are invariably selling in response to the downward spiraling market - which means they are selling as prices are dropping.
In other words, they are selling low when they should be holding their stocks instead.
That's right - study after study has shown that those who hold their stocks as the market tumbles come out ahead when it recovers! Like lemmings off a cliff, the herd's activities as the bulls exit the market are not conducive to developing a sound investment strategy.
Everyone who follows the herd suffers the same fate - and economic losses - that the herd suffers.
If you learn only one thing about how to buy stocks, learn this: never follow the herd.
Rigidly adhere to your set goal of buying low and selling high, and you will weather the storms that cast others about like ragdolls in a hurricane.
The best part is that the market always recovers.
That means that if you have held your stocks while others fled, you will be in a superior position when the recovery happens.
As stock prices rise, the herd that sold low to get out of the market will charge back in to buy as prices are rising.
And therein appears your opportunity to sell to them at the high rate that fits your strategy.
The old adage that you should always buy when others are selling - and vice versa - is a good first principle, but what about those times when the fundamentals of the companies being bought or sold don't justify following that adage? For those just learning how to buy stocks, the mentality of the herd can easily take hold and cast rational thought out the window.
Massive selloffs always drive down stock prices, which should generate bargains provided that the underlying fundamentals of the company are sound.
Yet, many investors apparently don't understand how to buy stocks with a "buy low, sell high" method.
In fact, in nearly every market downturn, you see hordes of investors rushing to sell everything they own.
The flaw in that approach is that they are invariably selling in response to the downward spiraling market - which means they are selling as prices are dropping.
In other words, they are selling low when they should be holding their stocks instead.
That's right - study after study has shown that those who hold their stocks as the market tumbles come out ahead when it recovers! Like lemmings off a cliff, the herd's activities as the bulls exit the market are not conducive to developing a sound investment strategy.
Everyone who follows the herd suffers the same fate - and economic losses - that the herd suffers.
If you learn only one thing about how to buy stocks, learn this: never follow the herd.
Rigidly adhere to your set goal of buying low and selling high, and you will weather the storms that cast others about like ragdolls in a hurricane.
The best part is that the market always recovers.
That means that if you have held your stocks while others fled, you will be in a superior position when the recovery happens.
As stock prices rise, the herd that sold low to get out of the market will charge back in to buy as prices are rising.
And therein appears your opportunity to sell to them at the high rate that fits your strategy.
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