Investing, Being Scared and the Swimming
Pool
Hypothetical
Situation: You have been invited to a
backyard party with approximately 400 other adults. The party is held outdoors where there is a
very large swimming pool. All of the attendees
at the party are enjoying themselves:
listening to the music, eating the free food and mingling. But, no one has moved near the swimming pool
or even dared to jump in.
You’ve always
been independent in mind and action, sometimes to the point of being labeled a
rebel. Tonight is no different.
You see the
swimming pool, it’s empty, the temperature is right
and your mood somewhat whimsical. But,
are you out of your mind? Do you want to
be the first person to take the plunge?
You only live once
- is your motto – so you seize the moment and go for the gusto. You are the first one, out of four hundred,
to dive in. At first, the water feels
great. But, all of sudden you become
scared. You know many of these people at
the party … and you, like a fool, are the only one in the pool. So as not to panic, you start treading water
– swimming laps might be a little extreme.
After swimming in
place for a few minutes, someone else decides to join you. This guy looks like he just departed from the
lunatic fringe, but you are both up to your necks in water and there’s no
turning back now.
As the next half
hour passes, a couple dozen more enterprising souls decide to join in. Next thing you know, there’s about forty
people splashing about the pool. Those
that are not in the pool have some mighty strange looks on their faces and for
the most part are ignoring those that are in the pool.
Another half hour
passes and the population in the pool stays the same. One of the hearty forty that dove in states,
“I thought there would be more joining us by now. I think it’s time for me to get out.” Pretty soon, ten people have gotten out of
the pool.
More time passes
and the majority that are not in the pool are getting antsy. They’ve been at the party for two hours and
been doing the same thing. A couple
decides to jump in (the pool). And soon
they are followed by a few more. And
with the increased activity and participants in the pool, it has become the
loudest part of the party. This starts
an avalanche of people jumping and belly flopping into the pool. Soon, there are more people in the pool than
there are out of the pool. The count
is: 350 in and 50 out.
The more people
that decide to jump in, the louder it gets, and truthfully the more fun it becomes.
The pool is
spacious and will hold more people than are currently in it. However, there are some people who refuse to
join in regardless of how great the potential for fun appears.
As a result, even
though the pool is now “rocking” at its best level, you have a perverse
thought.
Can it get any
better than this? Everyone that wants to
get in … is in. At, some point, the
party must end. Shouldn’t I just leave
on high note?
Just as some
people are doing cannonballs and others losing their trunks, you begin to dry
off.
Moral of the
story: After having completed your
research – lots of reading and applying your business education - the level of
the water, in the pool, is the price of your favorite investment. The water level in the pool – or price level
– is influenced by others entering and leaving the pool. By being the first person to enter the pool,
the water – or price level – was at its lowest possible point. This is the part of investing commonly
referred to as “buying low.” But, since
you were the first to enter the pool, it was the scariest possible moment. Early on in investment cycles, the water is
frequently turbulent as people enter and leave unable to decide if this is the
real thing. Once the public at large
decides to join the party, the mania phase begins – and things happen more
quickly. Once the last person willing to
enter the water – and all may not be willing – enters the water, the water has
no where to go but down. If you look
around and most everyone you know is in the water – or in the investment – it most likely is the
best time to think about leaving. This
is the part of investing commonly referred to as “selling high.” As a general rule, those that come late will
be given a little fun, but most likely they will leave at a lower level than
they entered. Entering early and leaving
early is the scariest of both worlds … because you are different – and many
times alone. If you want to maximize
your investment returns, the accounting practice of first-in, first-out may
prove the most profitable of all.
"A great IQ is not needed to do well as an investor, what you
do need is to detach yourself from the crowd.”
- Warren Buffett