Bottom Line/Personal: You try to buy low and sell high, but if you’re like many investors, you end up doing the opposite—you buy when a stock is near the top and looks like a sure deal…and then you bail out and sell in frustration after it has lost value. It’s one of the top mistakes investors make. So let’s put an end to it.
I’m Steven Kaye, editorial director of Bottom Line Publications, and this is Bottom Line On Your Money, where our experts help you create, invest and protect your wealth.
Today, I’m speaking with Vahan Janjigian, PhD, CFA, one of the best stock pickers out there. Vahan is editor of the MoneyMasters Stock Report newsletter, chief investment officer at Greenwich Wealth Management and author of two books, including Even Buffett Isn’t Perfect. Vahan previously served as editor of the Forbes Special Situation Survey newsletter, where he was ranked the number-one stock picker by Hulbert Interactive for the decade ending in December 2012.
Vahan, I am very pleased you’re here for the benefit of Bottom Line readers. Let’s talk about this habit of buying high and selling low—exactly the opposite of what we should do. Why do so many people do it?
Vahan Janjigian, PhD, CFA: Thank you, Steve. I would say that the answer to that question really has to do with psychology. In modern finance theory, we assume that investors are rational, but we find out in real life that they’re not rational. So they get a sense of comfort when stock prices are going up. They feel very comfortable with that…they feel very confident…and that’s when they want to buy.
But when stock prices are falling, they get scared and they don’t want to buy. It doesn’t make sense. If you think of anything else—if you have your eye on a nice suit, for example—you’re more likely to buy it when it goes on sale. But with stocks, people react differently. When they see prices falling, they get scared. They end up selling at the bottom. And oftentimes I hear them say things like, “I’ll never buy stocks again,” and they stay out of the market and they miss the next rally.
Bottom Line: So how do you, as one of the best stock pickers out there, avoid that same scenario?
Janjigian: Well, I focus a lot on asset allocation. What I tell my clients is, let’s decide how much of your money should be in stocks in the first place. Let’s say the answer is 70%. We have some leeway with that, so it could be anywhere from 65% to 75%. So when I see stocks doing really well, the allocation to equities goes up, and I take that as an opportunity to sell and bring the allocation back down. When stocks are doing poorly, that allocation goes way down—I take that as an opportunity to buy. So when you do this, you’re basically forcing yourself to buy low and sell high rather than buy high and sell low.
Bottom Line: So you’re creating a trigger that actually has nothing to do with the price of the stock per se. It’s the asset allocation. If you have more in stocks because the prices have gone up, you’ve got to dump some…you’ve got to get rid of some.
Janjigian: Of course. And then you have to worry about which stocks to buy, but right now you’re focused on how much you should allocate to stocks to begin with.
Bottom Line: How do your clients react when they’re on this wonderful ride—prices are going up, they’re wealthier every day or every week—and you’re telling them suddenly, “You know what? We’re going to slow this down a bit.”
Janjigian: My clients hire me to do this for them because they don’t have the confidence that they will do it correctly themselves. So they trust me to do the right thing, and I’ve found over the years that I typically don’t get calls from my clients when the market’s going way up or way down. They’re really focused on the long term, and they know that over the long term, they should do well with stocks.
Bottom Line: What about the idea of waiting until a stock has just started back on its way down? I hear a lot of people talking about this, that “I’m not trying to call the top of this stock. I know I can’t do that, but what I’m going to do is wait until it goes down a little bit, or maybe a little it more, and then I’ll take my money and run, and that’s when I’ll do it.”
Janjigian: That is a common strategy. A lot of investors use stop orders. They’ll pick a price, perhaps 5% below the stock’s current price, to lock in their profits in case the stock falls. The orders are triggered automatically, and they get out of the position.
I’ve found over the years, however, that a lot of times, especially when you’re talking about volatile stocks, the stock will dip, the orders are executed, they’re out of the position, and all of a sudden the stock will turn around and go back up again. So it’s a way to prevent yourself from losing too much money, but it could backfire, too.
Bottom Line: And what about the opposite end of it? The buying high as opposed to selling low. How do you tell someone not to join the train when the train is going, everybody’s having a good time and saying “I want to put my money into that”?
Janjigian: Even when the market is high, even when stocks have gone up a lot, I always find stocks that are undervalued. So I’m always focusing on the undervalued stocks. When it’s time to put money into stocks for a particular client, I’m going to focus on the undervalued stocks, regardless of whether the market is high or low.
Bottom Line: What’s the one takeaway trick that you can give to our viewers to help them not repeat the mistake of buying high and selling low?
Janjigian: First of all, focus on your asset allocation. Decide how much you should have in stocks to begin with, and use that as an opportunity to either trim back or buy more.
Bottom Line: And don’t stretch your allocation just because you’re doing very well.
Janjigian: Correct.
Bottom Line: OK. So there’s the trick. It sounds pretty simple, and it doesn’t depend on you knowing when a stock has reached its height or when it’s gone to the lowest point it’s going to go. It is just simply keeping your allocation the same by trimming when your stocks have gone up. Thank you very much, Vahan.
Janjigian: Thank you.
Bottom Line: Very interesting.
