August 9, 2008 – Are we complicit?

Seth Godin is, according to the dust jacket on his latest book, “one of today’s most influential business thinkers”. I happen to be a fan of his work, so I have to agree. He writes one of the best blogs on the internet; it’s in my RSS reader, and I read every post (he has learned the art of brevity, a skill that I have yet to master).

This week he wrote a blog titled Complicit, where he made the point, correctly I believe, that we the people are responsible for what goes on in this world. Why is there spam? Because people respond to it. Why do the big box retailers, in many cases, sell the cheapest goods possible, with the lowest level of service? Because we the people let them. If we shopped only at smaller, local stores with great service, the big box stores wouldn’t exist, or they would have to change. We allow them to get away with poor service. We are complicit.

Isn’t that exactly how it works in the stock market as well?

The flavour of the month stock goes up, so we all jump in to buy. That makes it go up, and we are all thrilled at how well it did. We are proud of ourselves. We are happy. We buy more.

On margin.

Then it starts to drop, and we sell. It crashes. We are sad. We are angry. We blame ourselves. We blame our newsletter gurus. We blame the bloggers. We get a margin call, so we sell some more.

Our over eagerness to buy and sell causes huge volatility, which leads to more volatility.

We are complicit. We the people make the market go up and down.

So what’s the solution? Seth Godin says that we have the power to support what we want, and again, I agree.

If I researched the fundamentals of a stock, crunched the numbers, evaluated prospects for the industry, and so on, and decided that Stock X was a good buy at $40, should I not be thrilled that is has fallen to $35? Should I not be buying more at this bargain price?

No, I get upset that I bought at the wrong price, so I sell the stock I bought for $40 for $35. Then it bounces back, so I jump back in at $42, just as it’s peaking. I wait until it falls back to $36, I get scared, and I sell again. I then buy back at $43, sell at $37, buy at $45, sell at $40, and so on.

Lather, rinse, repeat.

Who’s fault is it that I bought at the wrong times?

Mine.

I am complicit.

So here’s the plan for this week, and next week, and the weeks and months after:

I will do my homework, and buy at good values. If nothing has changed and the stock falls, I will hold. If it goes up and I can take some money off the table for a profit, I will take a profit.

I will not watch my computer screen every minute of every day.

I promise.

I was down big on Tuesday, then up big on Wednesday, Thursday and Friday, not great. I don’t panic on the downs, and don’t get too excited on the ups.

That’s it. Brief and too the point.

Are you complicit? Let us all know on the Buy High Sell Higher Forum. See you next week.