In mid-2016 the price of bitcoin was about $580. Fast-forward to December 2017 and the cryptocurrency has roared past the $17,000 mark. To put that in perspective, had an investor anted up roughly $6,000, those 10 bitcoins today would be worth $175,000. Not bad for an 18-month wait.
And so comes the temptation that any level-headed market maven will ignore: Is it time to buy into bitcoin — or any soaring commodity, for that matter — when the price hits an unprecedented, giddy peak?
The answer any seasoned value investor or buy-and-hold guru will give is an unequivocal “no.” But the same financial market that brought you the term “irrational exuberance” oft chases fantasies of a bottomless punchbowl. Bitcoin marks the latest example. Buying on margin in the U.S. stock market just before the crash of October 1929 certainly ranks as the costliest.
[See: 7 of the Best Stocks to Buy for 2018.]
“I think the reason people buy high, besides the fact that they are investing on emotion, is because they don’t know how to value a business,” says Tom Vilord, president and CEO of Wall Street Value, an investor consulting and education company. “It’s as simple as that.”
In fact, the investor conundrum of buying too high may be as old as the agrarian tale of free milk and a cow.
“I wouldn’t buy a $20 gallon of milk because it’s not worth that much, and I think everyone would agree with that,” Vilord says. “So why is it that someone would buy any stock when it’s at such an overvalued price? They don’t know what it’s worth, otherwise they wouldn’t be throwing money at these cryptocurrencies.”
Vilord has a point. Yes, many who bet on bitcoin made a killing. But the fact remains that bitcoin isn’t backed by any central government, and its explosion comes courtesy of pure speculation. It’s the same sort of stampede that drove the Dutch Tulip Mania of 1636. Nearly 400 years later in October 2017, JPMorgan Chase & Co. (NYSE: JPM) president and CEO Jamie Dimon called bitcoin investors “stupid.”
But to quote the fictional Forrest Gump, stupid is as stupid does. And the logic goes like this: If you don’t get in on a hot stock — even if it’s at the penthouse as opposed to the ground floor — you must be missing out. And so you take your place in a line that snakes longer than a queue for an overhyped Black Friday doorbuster.
“With a product that has no track record other than up, up, up, many inexperienced investors — which I believe include a good number of people investing in bitcoin — are young people,” says Walter Pehowich, executive vice president of investment services for Dillon Gage Metals, a precious metals wholesaler. “Emotions will play the biggest role in their decision to sell at low prices.”
[See: 13 Ways to Take Emotions Out of Investing.]
Yet if emotional investors lunge for the money bag when stocks soar, they don’t want to be holding the bag when investments plummet, says Steve Azoury, owner of Azoury Financial in Troy, Michigan. And so, this same species of shareholder is likely to sell low.
“It seems to overcome logic when planning one’s portfolio,” Azoury says. And behavioral finance experts say there’s plenty of evidence to back this up — not so much in the price of a share as the price of a scare.
It may be baffling why some investors dump dropping stocks out of fear, especially since a not-so-newbie like Warren Buffett boasts that he likes to buy in companies when they’re “on the operating table.” That takes scrutiny of facts to determine whether a company in critical condition is undervalued. The buy-high, sell-low types, by contrast, make their calls in all sorts of illogical ways.
In fact, some go alphabetical, according to Jennifer and Jesse Itzkowitz, husband and wife PhDs who have researched the phenomenon. They’ve found, for example, that neophytes frequently overinvest in companies with names or tickers at the beginning of the alphabet — which, if you think about it, probably helps companies like Alphabet ( GOOG, GOOGL).
As for the ABCs of smart investing, sell low can eventually turn into sell high, as survivors of the Great Recession can attest.
“If you bought right before the 2008 financial crisis and then sold two years later at the bottom of the market due to fear or nearsightedness, you would’ve bought high and sold low,” says Evan Tarver, investments analyst at FitSmallBusiness.com. “If, however, you held onto your investments through the crisis and took a long-term view, they’d be worth more than double today.”
As for bitcoin, only time will tell if today’s buy-high is, in its own twisted sort of way, destined to undergo an unprecedented seismic somersault. After all, many pundits said bitcoin was far overpriced at $1,000. And $5,000. And $7,000.
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
“Maybe in six months, $10,000 will be viewed as buying low,” says Keith Baker, a CPA and coordinator of the mortgage banking program at North Lake College in Irving, Texas. “We’ll only know down the road as we watch the price of cryptocurrency fluctuate. But still, the driving factor that causes investors to buy high is that they want to jump on the bandwagon.”
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Here’s Why Some Investors Buy High and Sell Low originally appeared on usnews.com
