When asked about the secret to building great wealth, J. Paul Getty, once America’s richest man, famously said, “I buy my straw hats in the winter.” And with that small kernel of wisdom, he laid out one of the great truths about investing. You must buy when other people are selling and sell when other people are buying.
This idea seems to be common sense and obvious, and yet so few investors manage to accomplish it. For example, we are now in the fourth year of a stock market recovery that began in March of 2009. Yet, throughout 2013, major news organizations such as CNBC have reported that most retail investors (average people like you an me), only returned tentatively to the market this year. That means that the average American sat out most of the market’s move, and is just now beginning to invest in stocks again, as the rally is getting long in the tooth.
Likewise, many of these same Americans are likely to stay in the market, when all of the professionals have long since gotten out. Because they were so late in returning to the market, they are less likely to recognize when it is time to move some money to cash, to await better opportunities that will eventually come. Many of these retail investors got really hurt when the market collapsed in 2008 because they held on until the pain became just too great, and then they sold near the bottom.
In short, the average American investor is more likely to buy high and sell low when it comes to the stock market. To use Getty’s metaphor, they are the one’s lining up to buy the newest an most expensive hats on the first day they are available.
Learning To Buy Like Getty
So how can the average investor do better ? I have been an active investor for over twenty years, and consistent success is no easy feat. However it is possible. The secret is to practice self control and to avoid greed. We must look to make smart purchases and to make equally smart sales.
First of all, look for the discount. In the short term, the market is a moody friend. One day it will love a company’s stock, and the next day it will hate it. Often this is true even with no underlying change in the company. We want to take advantage of the irrational sell-offs to buy good investments, and take advantage of the irrational run ups to make smart sales.
For example. A little over two years ago, silver was priced at almost $50 per ounce. Today it is priced at a little above $19 dollars an ounce. It’s the same metal, and it is used for the same things (investment, photography, technology, and more). Sure a few global realities have changed, but the basics are the same. I owned silver as it approached $50 and began selling it in small chunks around $42. By the time it peaked and began to fall, I was long since out of the position.
Likewise, now it has fallen quite some way. I began buying small amounts in the low twenties, and as it has fallen have continued to add small amounts to my position. Over time, I have built up a decent position at a relatively low price. Has it bottomed? I have no idea. But I do know that I am getting a good average price, and I will continue to slowly build at lower levels.
But when will it go up? I don’t know that either. What I do know is that, it is at the historically lower end of its range, and someday it will return to the higher end of its range. As such, I am buying an asset when I know it is low (and therefore out of season), with the knowledge that I will someday be able to take advantage of it becoming popular and moving higher again.
Like Getty, I am buying something that I know is useful, when it is unpopular and therefore inexpensive. I’m sure that Getty never knew exactly when he would need a straw hat. However, he knew that one day he would. With that in mind, he looked for a deal. You should too.
Look to buy great assets or companies, when they are on sale. Look to sell them, when they are very popular and expensive. Having the self-control to do both is where the skill truly lies.
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