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