Everyone knows the rule of investing: “Buy Low, Sell High”. Everyone has heard it over and over again. So, why don’t people abide by it?

What really happens?

A problem will happen which will cause a particular commodity to fall in price. For example, the S&L crisis of years ago caused everyone to be afraid of banks and bank stocks fell. Because of the subprime loans, real estate prices got inflated because too many people were bidding. When that bubble burst just recently, the newspapers were filled with horror stories of people losing their homes and prices falling. If Bill Gates gets a flu, the shares of Microsoft will plummet. What is the theme? The message is that when problems happen, prices of certain impacted commodities will fall.

Broke People, unschooled in the ways of investing see the problem and do not see the low prices. They cannot obey the rule Buy Low, Sell High because they cannot buy low because they cannot even see the low ones — they are too scared about the problem. They see the problem not the low prices.

Rich People buy when prices are low because they see low prices. Broke People do not buy when they are low because they see only the problem.

Similarly, when the problem goes away and prices rise or sky-rocket, then Rich People see the high prices and they abide by the rule Buy Low, Sell High and they sell, of course. Broke People read the headlines of the paper that a certain commodity (real estate, gold, stocks, whatever) is rising. They read newspaper stories of people getting rich overnight by buying far more than they can afford and then getting instantly rich in the hotly rising market. So, Broke People race in to buy when prices are too high. They cannot see the High Prices, they just see what they perceive as a huge opportunity.

So, here is the Rich Guy – Broke Guy Dance

When prices are high, Broke People buy from the Rich who are selling. Then, the bubble bursts and they fall. Broke People are so depressed, they sell — back to the Rich People because the prices are low. Rich People do not want that commodity, they just warehouse it for Broke People who will race in later when prices are high. And, the dance continues.

By: Raymond Aaron