The Only Three Questions That Count: Investing by Knowing What Others Don't

Chapter 3. QUESTION THREE: WHAT THE HECK IS MY BRAIN DOING TO BLINDSIDE ME NOW?

It's Not Your Fault—Blame Evolution

One of the first things we learn about finance is "Buy low, sell high." In the movie Trading Places, when Eddie Murphy and Dan Aykroyd prepare to corner the orange juice market (illegally and implausibly, but comically), you can tell the script writer was casting about for something finance-sounding to say. So Dan tells Eddie, "Buy low, sell high." What more advice do you need, really?

We all know the goal, but more often than not we end up doing the opposite. How hard can this be? Buy when stuff is priced low; sell when it's priced high. It's not rocket science. And yet, this problem is ageless and endless. Investors routinely buy and sell precisely backwards. For evidence, look at Figure 3.1 showing fund flows—the amount of money going into and out of equity mutual funds each month.

Inflows for stock mutual funds were highest during February 2000.^[45] That was about the best time in recent history to get out of stocks—at the peak of an ensuing three-year bear market. Fast forward to 2002, and the reverse is true. Everyone bailed from funds in July^[46]—a fantastic time for stocks—just before a new bull market. Here is incontrovertible evidence of investors buying high and selling low en masse. These weren't a few deranged ignoramuses engaging in this behavior. This shows a widespread group-think—a frenzied mob of loser lemmings lumbering in and out of the market precisely ...