Why is buying low and selling high so hard?

The phrase “Buy low & sell high” is something most readers have probably already heard. Solid philosophy, common sense, right? “Be fearful when others are greedy and greedy when others are fearful” as the legend Warren Buffett would say. However, the sentence is often reformulated to “Buy high sell low“ and thus represents the experience of most market participants in the cryptocurrency space or other markets. But why is buying low and selling high actually so difficult for most people, especially beginners?

This article will take a deeper look into the topic.

What makes it so difficult?

Guessing and the problem with being right or wrong: This applies more to trading than investing. Beginners tend to buy and sell for the reasons they make up in their heads, but in reality, they have just guessed. Even when they win here and there, they will lose all their profits if they continue to repeat that behavior. The random wins give false reinforcement to make the wrong decisions again or to think they are right.

Emotional attachment to money: This is a double edged sword. On the one hand, most people are refusing to invest a lot when prices are down . Even if they did so, they have a hard time afterwards when prices are high to sell. On the other hand, they refuse to take profits, especially if it is a lot of money for them. It is the classic battle between greed and fear.

The competition against the best: Obviously, everyone in the financial markets wants to make as much money as possible. Whether it is in investing or trading, you are competing with the best of the best, which are here to take your money. Getting good at trading and/or investing takes time if you really want to build wealth long term. 

Not being able to accept losses: This is a really common human psyche pattern that affects most traders and investors, it is known as the “disposition effect”. Behavioral economics describes the disposition effect as the tendency of investors to sell shares that have risen in value and to hold shares that have fallen in value. Losses are felt about twice as badly as gains.

Not really putting time into analyzing: If you are investing, you need to do your own fundamental analysis, or read those of others. When trading, you need to analyze the chart by technical analysis and other factors. A lot of retail investors & traders buy & sell without even investing their time to analyze their picks. 

Why is buying low so hard?

Being scared to invest into low prices: Just as the majority is ready to throw in as much money as possible when the price has already risen a lot, most people are scared to throw in a lot of money when prices look like they could go to 0. The best time is always when most people have left the market, are not interested in it and think it’s not worth it anymore.

Not sticking to the markets or investing & trading over the long term: As a bear market continues, more and more people leave, as it was already mentioned. While the bear market is depressing, it is the best time you will get to actually invest your time and get good at something. Invest in yourself, become an expert and have a huge advantage over the majority of people who will later rejoin in the bull market. 

Not having capital to actually be able to buy low: Bull markets leave a lot of market participants broke when the bear market has arrived, and due to their decisions, they are not able to buy or trade when prices are actually low. That’s why you should always have a stack of cash ready for those times. 

Not knowing if the price is too low: Such an obvious thing, if everyone knew when the price was too low, everybody would buy. Yet, nobody can say for sure. Don’t get me started with these funny chart and market sentiment indicators some websites provide. They give a very rough estimation, but never a real signal. 

Why is selling high so hard?

#1 Factor: Greed: I think this is the only and most important factor when it comes to this question. No matter how much money people make, it is never enough. The only way to conquer this in my eyes is to make a plan beforehand to exactly determine when to exit the markets. Also, you can always leave a certain percentage of your stack in the markets and wait for further price development. 

If it was that easy to know when the markets are high, everyone would do it: Such an obvious thing, if everyone knew when the price was too low, everybody would buy. Yet, nobody can say for sure. Don’t get me started with these funny charts and market sentiment indicators some websites provide. They give a very rough estimation, but never a real signal. 

The psychology of buying high and selling low

To answer this, we have to look into behavioral finance. Basically, the real problem for this lies in the herd behavior, which is deeply implemented into our human brains, whether we want that or not. I’m sure you know what herd behavior is. Basically, animals (and humans) tend to stick to groups and do the same things, that’s actually how most animal groups survived in the past.

When the latest stock or cryptocurrency gets extremely hyped, more and more people form a group and well… do the same thing. This was the case with Gamestop at the beginning of 2021 for example. By doing so, everyone thinks they are doing something right, and further motivation develops, which only attracts more people. By thinking now is the right time to do this thing or at least join it as soon as possible, the so-called Fear of missing out (FOMO) develops in every participant, which leads to strong emotions. FOMO is the term for people that feel the fear of missing out on something and therefore have to get in as soon as possible.

Due to this phenomena, people ignore the long term consequences of their decision and most of all lose the ability to rationally ask themselves if it is the right thing to do. This psychological problem is not exclusive to beginners, as veterans in the financial market tend to fall for it too, even with all their years of experience.

Conquering FOMO: Not being affected by FOMO is easy, but then again easier said than done. Every time you really want to buy something that went up really high in price already, ask yourself if it is really worth it. When you think the decision actually has the potential to turn out as a good one in the near future, only invest the money you are willing to lose. Simple as that. 

• Have a plan on when you want to enter and exit the market.
• Don’t invest into things you do not understand.
• Look at your financial/mental health and ask yourself if the decision is really worth it.
• Take breaks if you’ve been hurt and don’t try to make it back the next day.
• Keep track of your mistakes and progress by writing them down, as well as analyzing and learning from them.
• Ask real experts and people you believe in their opinion about your decision and always do your own research.

Conclusion

To become someone who actually buys low and sells high requires work time. Everyone knows that it is the only thing to do to even be able to make money, yet most people can not do it. Just like everyone knows that eating healthy and working out is the best for their body, yet most people can’t get themselves to actually stick to it. What I want to say here is: Most people do not have the patience, discipline and required skill to do it. You need to have knowledge and therefore learn from your past mistakes if you really want to make profits from trading and investing long term.