Here’s the flywheel driving “buy high & sell low” behavior:
- A stock’s price starts going up
- The higher and more dramatic the increase, the more it attracts media attention.
- Investors feel FOMO and buy
- When the price falls, the investor forgets why they bought the stock, and sell.
Rising prices – especially if they’re quick – suck attention.
No one gave a shit about toilet paper until people started hoarding them during Covid and prices shot up 15.6%.
This happens in all kinds of markets, across all types of media. One week it might be Dogecoin, the next week it might be some forgotten tech stock.
3 observations why we react to price this way:
- We value what society tells us is valuable. This is most easily communicated via price. We naturally don’t pay as much attention to things of low value.
- Novelty: Let’s say a stock has been sitting quiet for a while now. The sheer increase in price is new information that can make us feel different about it. The media’s excitement for Bitcoin is uniquely driven by increases in its price, instead of its far more interesting story.
- FOMO: we don’t want to miss out on gains, especially if other people (via price) tells us something is valuable.
All reactions based on price could be balanced by taking a long term view.
Instead of buying or selling out of reaction (to price or otherwise), build conviction over time.
When there’s an asset that’s not getting much attention amidst price fluctuations, remember: Silence is golden.
When no one else is paying attention or feeling the hype, that’s the opportunity to “get in early” on an investment.
When it’s quiet or prices aren’t exciting, that’s when long term investors get to work.
Bonus: Long term investors have the luxury of not dealing with short term fluctuations.