Fix It Friday Ep. 18 - The Destructive Buy High, Sell Low, Repeat Until Broke Investor Behavior: The Causes and the Cure

• Emotional investing driven by behavioral biases can lead to buying high, selling low, and losing wealth
• Distinguishing stock price from company value helps investors avoid panic selling
• Portfolio rebalancing and long-term ownership strategies counteract emotional decision-making
• Behavioral finance awareness improves investor discipline, confidence, and long-term results

Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth, LLC Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com. 

Jonathan Blau: Hello everybody and welcome to another episode of. The Fix It. Friday edition of our Crazy Wealthy podcast today, uh, I'm gonna actually talk about one of the most [00:00:30] destructive patterns in investing as it relates to a behavioral quirk, and that is the buy high.

Sell low and repeat until broke strategy. Sounds absurd, but, but there's actually millions of investors who [00:00:45] fall into this trap every year. So today I wanna explore why this happens and hopefully give some contextual framework about how we can identify. When it's happening to us and how to overcome it.[00:01:00] 

Voiceover: Welcome to the Crazy Wealthy Podcast with your host, Jonathan Blau. Whether you're just starting out or are an experienced investor, join Jonathan as he seeks to illuminate and demystify the [00:01:15] complexities of making consistently rational financial decisions under conditions of uncertainty. He'll chat with professionals from the advice world, entrepreneurs, executives, and more to share fresh perspectives on making sound decisions that [00:01:30] maximize your wealth.

And now here's your host. 

Jonathan Blau: First I want to talk about the pathology. What, what causes investors to, uh, behave this way? And one of the key [00:01:45] reasons is that investors conflate. Price of their investments with the value of the companies they're invested in. What I mean by that is when stock prices drop and remember, stocks are just certificates that, uh, [00:02:00] represent our ownership interest in a company like an Apple computer or a Coca-Cola, much the same way that a deed evidence is our ownership of a house.

So when the price of the stock drops, investors somehow think that the [00:02:15] long-term enduring value. Of whether it's Coca-Cola or Apple computer is also dropping. And of course that's not what happens. So price and value are two different things and, and the way investors can start succeeding [00:02:30] in terms of getting away from this buy high and sell low behavior is to stop thinking of their investments as investments in the stock market, and instead think of their investments only as investments of the great companies of [00:02:45] America and the world.

That distinction is critical to make and, and to start training ourselves to think in that way will absolutely help to, to break this pattern that we are almost all susceptible to at some point or other. So [00:03:00] every year, on average, the s and p 500 has declined by about 15% since 1980. And every five years we see a bear market meaning a drop from a previous high in the, in the markets level of at least [00:03:15] 20%.

The average bear market decline is, is about a third. So these are normal declines. There's nothing catastrophic about them, but when they happen, particularly when the declines I've seen in my career, and this is just [00:03:30] from what I've seen, this is not empirical data that I study when we tend to go down below 25 or 30%, the real panic sets in and unfortunately, by the time we're down that much.

The decline is no longer discounting, whatever the [00:03:45] problem is. Let's say the pandemic or the economic shutdown in 2020, it's no longer discounting that problem. It's counting mass, panic and fear, and at that point, investors seem to throw in the towel just at the point. [00:04:00] When the company prices, the stock prices represent some of the best values that they can enter into these great companies at in terms of ownership at low prices.

And it's just at that point when investors want to sell low. [00:04:15] And so what happens during euphoric markets, which are the opposite of panic? I always look at euphoria as the, the, uh, the complete absence of an adult sense of fear. So we just want to, at all costs, [00:04:30] uh, give into envy, fomo, fear of missing out and chase whatever's going up.

And when that happens, um, when people see others making more money than they, uh, make, they jump in and chase things that are already up 100 to [00:04:45] 200%. And, and it's the same. Uh, same problem that causes these things. It's, it's conflating price with value. So I'm gonna step in for a second to two behavioral biases that also [00:05:00] come into play, uh, with, with these behaviors.

One is called loss aversion bias. It's proven that we dislike or feel the pain of a loss two times more than we feel an equivalent gain is pleasurable. And so what we do is we [00:05:15] don't seek to maximize or, or engage in strategies that will maximize our long-term benefit, but that will minimize our chance for short-term loss.

So that's a very powerful bias or tendency that, that we are just pre-wired to exhibit. And, and [00:05:30] that certainly comes into play here with the buy high, sell low behavior, and then FOMO and envy. Uh, we chase what others have. Especially, and even when it's overpriced. And the reason we do it, I distinguish between envy and greed [00:05:45] because in reality a lot of people want more things, bigger things, better things.

But if you imagine yourself on a desert island where nobody else was around except you and your, your loved one, um, would you still want the Ferrari? Would you still want the big house? You probably wouldn't. [00:06:00] Because there's no such thing as wanting greater things in absolute terms, it's always in relative terms, we want a bigger thing.

'cause our neighbor has something bigger than we have, and once that disappears, we don't really care as much. So that's envy. That's not really [00:06:15] greed. Just wanting things for the sake of wanting 'em. We want things because we want to have. The nicer, bigger thing than, than the other person we see has, why not?

We deserve it. Right. So Warren Buffet, by the way, along these lines, has a great, a great quote that I love. He says, people start [00:06:30] being interested in something because it's going up, not because they understand it, but the guy next door who they think, who they know is dumber than they are, is getting rich and they aren't.

I I, I just love that quote. 'cause it's really what [00:06:45] happens. There's another, um, behavioral quirk that causes the buy high, sell low behavior, and that is the way we process economic and financial inputs. So in everyday life, with everything outside of, [00:07:00] uh, investments, we process, uh, our economic inputs in a way that's called counter-cyclically.

It just means we're attracted. Our demand goes up when prices go down counter. And conversely, our [00:07:15] demand for goods and services goes down when prices are going up right counter, and we behave that way with every economic and, and, um, financial input except one that's investments in general and in particular, equities or stocks.

When the price of stocks is [00:07:30] high in rising human nature, uh, believes that the opportunity to invest at higher prices for future gains is increasing, and that the risk of buying in at these higher prices is decreasing. Conversely, when the price of [00:07:45] stocks is falling, human nature is repelled thinks that the risk of buying in at these, uh, prices to great companies, uh, at lower prices that they can pay for the future, earnings and asset growth somehow will yield lower returns.

And the risk [00:08:00] of doing so buying at these lower prices has increased. So, of course, reality isn't different than what human nature thinks in this regard. It's the opposite. Just think about it, every year in this country. From Black Friday to Cyber Monday, everybody's [00:08:15] spending records, amounts of money, almost everybody.

And are they doing it because prices have gone up during that weekend? No, of course not. They're doing it because things are on sale. But again, in just this one way price of stocks, people behave in the opposite direction. [00:08:30] That countercyclical, what I call bias flip, is something that we need to be aware of and we need to, um, try, try to address it.

And by being aware of it and by thinking of, uh, of, of companies instead of stocks [00:08:45] and, and understanding that when the market goes down 30% or so, um, if I have a problem, uh, with, with not conflating price and value, just simply take a ride in the car, go to Starbucks, buy a coffee, go into the mall, [00:09:00] go to the Apple store.

Uh, take your bounty to quicker picker up or to, you know, mop up the spill. And understand that, that, uh, that that Proctor and Gamble and Apple and Coca-Cola, uh, and, and, and, and my wife I know certainly, uh, [00:09:15] shops at Amazon multiple times a day. I promise you that people don't stop doing that when the market's down 30%.

And so keep those things in mind, get in the car, do those things. It'll help you to become more rational about the frequent. Sometimes [00:09:30] steep, but always temporary declines in the prices of the great companies that we own. What we need to do at the end of the day is a mechanical way to address this behavior as well.

It's a portfolio management strategy. It's called rebalancing. So for [00:09:45] example. In our portfolios, we may have just as an example, five offsetting investment, um, options. So within the equity markets, it might be small company exposure, large company, uh, [00:10:00] domestic, international. And, and then, um, value as a style versus growth is two different major styles.

And if each of the five represents initially 20% of my exposure. But one of them [00:10:15] disproportionately skyrockets in price. For whatever reason, it's gotten much more expensive and the other ones are now selling outta sale. What we do is we rebalance, we take that, uh, one that's gone up 40%, and we, uh, kick some of it out of the [00:10:30] portfolio and we take advantage of the, uh, sale prices of the other four, and then we rebalance to our, uh, prescribed targets that we set out with.

Remember people's plans, uh, exposures shouldn't change unless their [00:10:45] goals change. We shouldn't change our plans in response to envy or fear. We should never move our portfolio in response to to market dislocations politics. Geopolitics or, or, or anything else that we hear on the news that might move us to want to [00:11:00] do that.

It's human nature. It's okay to be afraid. It's okay to to feel envy, but it's never okay for an investor who wants to succeed in the long term to respond to those emotions by changing their portfolio in response. So hopefully this podcast has [00:11:15] been helpful in helping you address the buy high and sell low behavior that many of us exhibit, if not always, often.

And, uh, with that, uh, thanks for tuning in today and look forward to seeing you on our next episode of Fix It Friday. You can catch us on. [00:11:30] Apple, Spotify, uh, YouTube, and, uh, all of your favorite venues, as well as our crazy wealthy podcast.com website and our fusion family wealth.com website.

Voiceover: [00:11:45] Thank you for tuning into another episode of The Crazy Wealthy Podcast. For more insights, resources, and to sign up for our newsletter. Visit Crazy Wealthy podcast.com. Until then, stay crazy wealthy.[00:12:00] 

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To provide investment advisory services, a copy of [00:12:45] Fusion's current written disclosure brochure discussing our advisory services and fees is available upon request or at www.fusionfamilywealth.com.