Why indeed? (suffer on a good year) First, let’s put things into perspective. Here, we always talk about investing and the suffering we are talking about has to do with ailments that we get if we are a chronic worrier. If you read my post in this channel prior to this one…well, yes, this is a continuation of that.
This is still about Fear and Greed but set in the good times. You are not really thinking that nobody is making money right now (although to the detriment of almost all of us), are you?
Let us take the case of oil. The price of oil has never climbed so fast as it has in the last two years. (By the way, we are only using the movement of the price of oil here as an example of the market movements.) If you have invested in oil since, let say, the middle of 2006 and continued to do so until today, your money must have already doubled – at the very least. That is if, by some stroke of luck or genius, you have decided to keep your money growing with oil as the vehicle of choice.
Notice how the speed of appreciation of the price of oil seems to have coincided with the subprime mess and its resulting financial catastrophe? (But that is an aside, sorry. Besides, someone else have already touched on that subject)
The simplest way of looking at how your money have grown is by getting the price of oil today and deducting it with the price in 2006 which was around US$70/ barrel. Had you sold at the exact time that the price touched US$140 the other day, your money would have actually doubled!
Well, of course, you still have to remove taxes, commissions, etc., from that amount, but hey, it is not everyday that you see your money multiplying that fast! And not when everyone else’s investments are crumbling.
Now, I said that was the simplest way of looking at it. As the experts would tell you, “it is always clearer to look at the rearview mirror” and we just looked at the “rearview mirror.”
Let’s try looking at it now from a different vantage point. Let’s say, your money has already earned you US$25 for every barrel of oil that you own. That’s about 35.71% of your US$70 capital per barrel. If you knew that the price will continue to go up, I am almost certain you will hold on to your purchase and allow your profit to go up some more.
But if the upward surge has already stopped for quite sometime and the price is beginning to inch down, what will you do?
If you are a chartist (somebody who believes in technical analysis) and you are no longer seeing the right combinations of candle sticks, and the volume has dissipated, and the stochastic is showing you an overbought signal, etc., etc., you will probably sell.
The problem is, barely 2 seconds after your order has been matched, while you were beginning to feel good about your decision and the profit that you made, a news bulletin came out of the wires saying that a major oil field has been attacked by some armed militias and millions of barrels of oil cannot be delivered to the refineries.
That’s a major story that spells an even higher price of oil! So, now, you are no longer computing the money that you earned by selling your oil inventories. You are instead computing the money that you lost by selling too early!
You came rushing back to the game and tried to buy everything that you can find, but the “smarter” fellows have already taken over. You cannot get a match for your bids as the price keeps getting higher. You naturally adjusted you bid accordingly and… finally, after a number of attempts, out of some miracles, somebody sold you his inventories. You grabbed the opportunity and bought everything that you can find within your means…
This news, after, all has just developed!
But wait a minute! How come there seem to be a lot of people who are selling now rather than buying? Ha! You said. Not this time. You took a breather and get your bearing in the scheme of things. And you were right, it was just a correction. The price is consolidating because it just went up very fast indeed. But you also noticed that you were not able to buy the commodity at the same amount you sold it.
In fact, you were able to buy your present inventories at US$10/ barrel higher than when you sold it. Thus, instead of making a profit, you actually incurred even more losses.
Now, are you ready to trade again? Because you see, the price is still sliding!
Of course, with the benefit of knowing the future (as in now – as the future) you would have probably kept everything you bought that day because you know that in the future (meaning, today) the price of oil would be US$30 or US$40 USD higher.
But without the benefit of “hindsight,” what do you think you would have done next?
As you very well know, these past few weeks have seen the price of oil pierce some new record highs but the price have also gone down and up again and down again and up again etc., according to what the “market” perceived to be happening at any given moment…
When you are in the middle of it all and (and you have actually lost rather than made money) and you were hearing a very good rationale why the price will continue to go up while you are already thinking of selling because of once again depressed prices (when compared to your buying price)…
And then you hear a very compelling reason again why the rally has already definitely ended while you have just bought more shares and so on and so forth, try to get a grip of yourself and figure out a way on how you can make (or recover) all of that money without hurting yourself – or suffering a cardiac arrest.
Sometimes the answer can be found by tempering your fear and greed.
LIKE WHAT YOU’VE READ?
If so, please join over 5,000 people who receive exclusive biweekly online business and blogging tips. I promise I promise you won’t regret it!