5 min read
This story originally appeared at high level
By Guillermo Barba
The best investment advice I’ve heard is: Buy cheap and sell high. Although the reasoning seems obvious – especially when we are talking about a business that buys and sells physical goods – in the financial world we find that the vast majority do not apply it and consequently lose investment or perform poorly.
Without a doubt, the fact that we are emotional beings is one of the causes of this common mistake: when you see an asset rise faster and faster in a short period of time, Greed hits us and we all want to buy it to get on this winning “wave”.
The problem is that when the great crowds start riding that wave, It’s usually a sign that the end of this bull market is near.
It is precisely the huge hordes of retail investors who are continuously making large purchases that are responsible for the parabolic movements of the market, one after another, shooting to all-time highs. Extreme euphoria is a clear sign that the risk is about to peak, and once the “peak” is reached, a rapid fall is inevitable.
In this way, amateur investors switch from unfounded optimism to fear of loss overnight. This leads to panic selling, which further depresses the market, generate greater fear and pessimism, more desperate sales, more price drops and so on to the bottom.
It should be noted that while these amateur investors were buying from the professionals first at extreme prices, during the fall the roles were reversed and it is the professional investors who are buying back from the scared amateurs at auction prices. It always was and will be until the end of time.
Some – the winners – employ the maxim of buying low and selling high, or what is the same thing: sell high and buy low; others who lose do the opposite: they buy high and sell low.
Extreme euphoria is a clear sign that the risk is about to peak, and once the “peak” has been reached, a rapid crash is inevitable / Image: William Iven via Unsplash
This, which I am telling you, is happening again before our very eyes, and it is very likely that it will happen in the coming months, and perhaps for most of 2021.
And the fact is, after the worst economic collapse of our time – due to the mismanagement of the crisis due to the COVID-19 pandemic – next year will certainly look a lot better in comparison. Official discourse and mainstream media will focus on how well vaccines work, control, reopen and recover the population.
If the above is indeed confirmed, markets will accompany that optimism with a surge in stock indices and risk-weighted assets, emerging currencies like the peso, a decline in the dollar, and a decline in safe haven assets like gold and real assets.
But still, This is going to be a huge trap This will once again topple the great mass of unsuspecting investors.
Let’s not forget that in response to the unprecedented crisis sparked by the new coronavirus, central banks and governments around the world launched the largest round of monetary and fiscal “stimuli” to date. These include again interest rates at historic lows close to zero percent, credit expansion, unlimited money creation through the purchase of bonds, extraordinary and deficit public expenditure, etc.
What is stated in the previous paragraph leads to greater corruption of the monetary system, making those who save in currency and invest in fixed income instruments the biggest losers, those who buy high and sell low. The big winners will be those who accumulate financial instruments that will be valued in the future due to this money corruption.
In order to the fall of the dollar, gold, silver and other real ports that has already begun due to overly optimismThis will again entice amateur investors to sell them while they continue to decline, just as seasoned investors will pile them up at bargain prices.
The moment we lived is historic, a great opportunity to stop being part of the great mass of lost investors, those who follow the majority to be one of the few who overcome emotions with reason and win the way .