Raise your hand if you agree with this famous quote from Baron Rothschild, an 18th century British banker and a member of one of the world's richest families:
"The time to buy is when there's blood in the streets."
Good advice, no argument there. OK -- now, how about this adage:
"Buy low, sell high."
Again, you'd be hard-pressed to find an investor who disagrees with it.
Then why in the world do so few investors actually follow these rules? In October 2007, when the DJIA topped 14,000 -- how many sold their holdings? And when stocks scraped the bottom below 6,500 in early March of this year -- how many called their broker and yelled, "Buy, buy, buy!"?
It's hardly a stretch to say that in each case, only small minorities of investors acted. The rest waited. At the 2007 top, paralyzed by greed, they waited for "the Dow at 40,000." At the March lows, they waited paralyzed by fear. In both cases, the eternal cycle of greed and fear did what it always does: It took the money from weak hands and transferred it to the strong ones.
Harsh? Yes. But that's just how the market works. Despite a common misconception, it's not a place where everyone gets rich quick.
I'll go one step further and suggest that even those gutsy investors who bought at the March lows will hesitate to sell when stocks are higher a few months from now -- thus fulfilling only one part of the "buy low, sell high" adage.
Why is it so? The Elliott Wave Principle explains it best: investors herd. Human beings find perceived safety in numbers -- and it's very, very hard to break away from the crowd, whether at market tops or bottoms. Being a contrarian is not for the faint-hearted.
Still, some manage to do it. Baron Rothschild bought when everyone sold. Sir John Templeton (look up his investment philosophy if you don't know it) sold tech stocks in 2000, and as early as 2004 warned (along with EWI's founder and president Bob Prechter) of the real estate bubble, also saying it was "a dangerous time to own stocks."
How do these investors do it? Well, some simply have both the uncommon intuition for extremes in crowd psychology and the guts to act while others wait. Others have a method -- a contrarian method like Elliott wave analysis.
The Dow is up 23% from its March lows. Do you know how long it might rally? Will you know when to sell? Our Financial Forecast Service can help you make those decisions right now. Try some contrarian thinking for a change, risk-free for 30 days.