Tuesday, November 13, 2007

When bad is good

If you’re an active investor, be prepared to the psychological roller-coaster of being successively elated and depressed. When the market is going up and your positions are doing well, you will instantly come to the conclusion that – somehow – you must be some kind of a genius. When this mode of thinking starts seeping through your little brains, you should sell and take your profits if you are indeed very smart. That seldom happens as we’re not nearly as bright as we think we are. The reverse is totally symmetrical. When hell breaks lose and the market goes down, despair becomes the order of the day and you want to disappear, go into profound hibernation or even die.
The paradox is that when you hit bottom is when the best buying opportunity is found. Without a doubt this theory sounds like music to everyone’s ear, but to be able to exert that option, you should have listened to your first admonition, which was to sell (raise cash) when the going was good and when you were convinced that you were SO intelligent. Easier said than done…

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