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Buy Low, Sell High

by Rajen Devadason

If you can keep your head when all about you
Are losing theirs and blaming it on you
If you can meet with Triumph and Disaster
And treat those two impostors just the same…

…You’ll be a Man, my son!

Rudyard Kipling

Well, if you’re a glutton for punishment - and adrenalin-inducing thrills - you’ve probably done that more than once, sometimes in the same afternoon, while on holiday in some magical place like Disneyland, perhaps. Intriguingly, there are great similarities between the emotions felt during a roller coaster ride and those experienced during periods of great investment volatility.

I can say that with confidence because I've gone on my fair share of roller coaster rides, mainly in the US, and I’ve spent many years observing, participating in, losing and gaining at the serious game of equity investing, primarily in my home country of Malaysia.

I’ve lost money as markets crashed, and made money as those same markets recovered.

Through all my travails, what I’ve learnt is that when it comes to riding the investing ‘roller coasters’, my emotions are not the best barometer to guide my actions.

Let me tell you why:

When markets are high, I tend to get greedy and feel the urge to jump in with even more money.

When markets are low, I suffer pangs of fear and panic that cause me to want to bail out.

And I have done both often enough to realise that those courses of action are usually the wrong things to do at those times. In hindsight, it almost always seems the best course of action would have been to do the exact opposite of what my gut feelings were shouting out for me to do.

Now, Confucius once pointed out, “A superior man is the one who is free from fear and anxieties.”

I’m inclined to agree with that ancient Chinese sage, but the truth is when it comes to investment markets, only two emotions tend to reign supreme - fear and greed.

And both breed anxiety!

Therefore, if you want to have just as an exhilarating a time in the investment market over the long-term, as you do on a wild roller coaster over the short-term, put in place strategies that allow you to exercise almost Vulcan-like control over those pesky emotions!

 And, if you lack the self-discipline of Star Trek’s Sarek, Spock, Tuvok or T’Pol, as is the case for almost all humans, then embed strategies that allow you to distance your investment decisions from those emotions.

In my day-to-day work as a Securities Commission-licensed financial planner in Malaysia, I utilise two strategies called dollar-cost averaging and value-cost averaging that allow investors to protect themselves from their own highly developed tendencies to give in to fear and greed at the worst possible times.

I will briefly describe them later in this article, but those interested in learning much more about both dollar-cost averaging (DCA) and value-cost averaging (VCA) are welcome to read and download, if you like, the far more comprehensive RESOURCE ARTICLE 5 in my archives at a site that I believe you'll find useful.

WHEN INVESTING, LEARN TO DISTANCE YOURSELF FROM YOUR EMOTIONS

The people who succeed over the long haul in investing are the courageous. That isn’t too surprising. The courageous tend to dominate every field they venture into.

If, that is, their courage is tempered with wisdom and strategic knowledge.

I can’t help you with the first. Wisdom, in all her glory, you will have to nurture through long years of study, thought, experience, contemplation and well-directed practice.

But strategic knowledge, you can begin to pick up from books. One that I’m rather fond of is my very first book, Your A-Z Guide to the Stock Market – And all You Need to Know About Capital Terms. It contains 1,001 terms that are cross-linked in such a way that you will be able to decide in which direction you want to begin your exploration of financial and investment terms. (If you would like to order a copy, you may do so here.)

You already know that the oldest formula in the world to make money in business or investing is to buy low and to sell high.

Frankly, in the game of growing long-term wealth, nothing has ever been invented that can beat that easily understood strategy.

Whether it’s wheelbarrows or widgets, pharmaceuticals or paper assets, the only way to grow rich is to buy low and sell high.

Thankfully, in the investment world you can employ excellent strategies like dollar-cost averaging and value-cost averaging to effectively buy low and sell high.

In the case of dollar-cost averaging, you invest equal amounts of money, at equal intervals, regardless of market conditions. The net result over many years is that you end up doing most of your buying at the lower end of the price fluctuation band.

You end up buying low.

You then can wait for a time of market strength to sell high!

Value-cost averaging is similar in concept to dollar-cost averaging, but instead of investing equal amounts, you invest variable amounts that are (kind of!) inversely proportional to the market level. So the higher the market is, the less you invest, and the lower it is, the more you invest.

But if all you have today is a small amount of money to start with, I would urge you to save a bit of that money in the bank each month to build up your emergency buffer account, and then invest the rest in a proven mutual fund or unit trust fund, which is an investment vehicle that pools or collects relatively small contributions from many investors with similar financial aims.

The key thing is to get started.

Procrastination may be best known as the thief of time, but in the world of personal finance it is actually a much more effective thief of future wealth!

Don’t let it rob you... blind!

My advice:

Act today – increase your knowledge, save your money, and commit to becoming a lifetime investor!

In closing, however, if you feel you aren't quite ready to start investing seriously because you need to learn to save first, then do help yourself to the information in these 2 free articles:

How to Start Saving Money

What is a Cash Flow Statement?

(And if your Number 1 Goal for the future is to learn how to set powerful, effective goals, you may want to read my ebook on goal-setting entitled UNLEASHED!)

© Rajen Devadason