â€œBuy Low Sell Highâ€ is the Way Rich People Double Their Income â€“ Why is it So Scary?
By Raymond Aaron
â€œBuy low, sell highâ€ is quite possibly the oldest of axioms in investing in the stock market. While on the surface it seems like a simple rule, the fact still is that some people make money on the stock market and others donâ€™t. The issue is that there are certain intricacies in these four words that some people donâ€™t understand. And so, the rich remain rich, and the poor remain poor.
Whatâ€™s really going on?
Imagine this situation. Some problem happens which causes a particular commodity to drop in price per share. Think of the S&L crisis from a few years back. Because of the subprime loans, real estate prices inflated because the market got saturated with bidders. When inflation goes on for too long, the bubble is bound to burst. When it all came down, every news medium had horror stories of people losing their homes-people you would never expect. The prices in real estate plunged, everyone became afraid of banks and their stocks fell. Thereâ€™s a saying that if Bill Gates catches a cold, the shares of Microsoft will fall. In other words, if a problem happens with a commodity, the prices of related commodities will drop.
Certain people, uneducated in the school of investing can only see the problems of the commodity and miss out entirely on the fact that its prices are at a low point. They miss the opportunity to â€œbuy low, sell highâ€ because the fear over the problems clouds their judgment. They can only see the problem and not the opportunity.
Other people know the game. When stock prices on a commodity are low, they buy, regardless of problems with the commodity. They may not even pay attention to whatever scandal led to the price drop. These opportunistic types are the ones that make money off the market.
Naturally, once the problem with the commodity goes away, the prices will rise again; maybe even shoot through the roof. Guess whoâ€™s at the advantage in this case? Thatâ€™s right, the savvy investor who bought low now gets to sell high.
The other group reads in the newspaper about a certain commodity (real estate, stocks, gold, whatever you can think of) is on the rise. They probably also see in these headlines that people are getting rich beyond their wildest beliefs by â€œselling the farmâ€ and buying everything they can get their hands on.
This is how it plays out.
When the prices are high, the less affluent players buy from the wealthier share holders. Eventually, the inflated bubble bursts, and the prices drop. The inexperienced buyers panic and sell-right back to the wealthy players, who will buy it just because the prices are low. They really donâ€™t care to have the commodity; they just hold on to it until the less savvy come along when the esteem (and prices) rise again. And so, the dance goes on.
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