Last week, we saw the annual shopping catastrophe known as Black Friday.
People got up from their holiday dinners or arose at 2:00 am on Friday to rush out to stores to buy stuff at bargain prices. The search for bargains is so intense that each year violence is reported as shoppers contend for door busting bargains.
Fistfights, semi-riots and brawls are reported across the nation every year in this attempt to buy stuff at lower prices during the festive holiday season. This phenomenon extends all the way to the following Monday now, and companies that do not block sites like Amazon.com (AMZN) will see a marked drop in productivity as workers spend the day pointing and clicking for deals.
When it comes to holiday shopping, it seems that price is everything.
We spend a lot of time researching the stuff we buy as well. Buyers are particularly careful with larger items and will scour the web for reviews and advice in buying larger items. They are willing to spend hours arguing with the dealer to get an extra $100 off and a free set of floor mats. Your average consumer wants to be well informed and is incredibly bargain conscious about the things they buy, especially pricier durable items.
This attitude makes a lot of sense, as getting the best product at the best price is just good, old common sense. It is a shame that this trait does not spill over into most people's investments. In a study done by large asset manager BlackRock (BLK) , it was found that in the past 20 years, the individual investor has underperformed just about every asset class and inflation. Among the chief reasons for this underperformance is a lack of information and over trading of accounts.
The same person who spends two hours arguing with the salesman over $100 and free floor mats when purchasing the new car he spent two months researching will put $20,000 or $30,000 into shares of Tesla because they make electric cars and his broker said it was a good idea. After getting up at 2:00 am to save $50 on a new tablet computer to give to their Luddite Uncle, they will come up dial up the online broker and spend thousands on a stock they never heard of that broke an uptrend channel and has inverse head, shoulder and elbow patterns in recent price movements.
Individuals have a tendency to buy what is hot right now and are heavily influenced by other investors.
If everyone owns Apple, then they feel like they should own it as well. If all the guys at the office are loading up on Electronic Arts (EA) because their kids want the newest game coming out, others feel like they should buy shares as well so as to not miss out on these fantastic potential profits.
Very few people stop to think about the value of the company and the relationship between that value and the price of the stock. They use stop losses and jump from stock to stock based on patterns and popularity with almost no thought given to basic business principles.
It is even worse when it comes to entering and exiting the market.
There have been countless studies done that show that retail tends to panic stocks near market bottoms and buy into the euphoria that develops near market tops. Investors let fear and greed get the best of them, and this leads to poor investment performance. Once again, it is a lack of knowledge and information about valuation and sound business principles that cause the lean to the wrong way at almost exactly the wrong time.
Ben Graham once advised investors to “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” That is just basic common sense but almost on one uses it in the stock market. When you go to the grocery store and find steak at half price it's a good time to buy steak. If steak is at twice the usual level it's a good time to have a chicken dinner. Buying stocks when they are down in price works the same way.
If companies are on sale, we should load up on them.
If they are extended in price and a lot higher than they were last year it is probably a good idea to start selling shares. Buy Low, sell high is the oldest adage of them all when it comes to markets but almost on one applies the maxim for profits.
Graham also advised, “Experience teaches that the time to buy stocks is when their price is unduly depressed by temporary adversity. In other words, they should be bought on a bargain basis or not at all.”
Investors need to bring the same passion for bargains to their investment portfolios as they do to shopping for smart phones and socks.
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpeculation.Com as well as several print publication including Active Trader and the Wall Street Digest. Learn which 3 low risk, high yield stocks Tim owns for the trade of the decade.