We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. - Warren Buffett

You did WHAT?

The bottoming out of the stock market led many to do what is clearly in contrast to conventional wisdom: they sold their newly-undervalued stock.  This is never a good idea.  What would lead them to follow this path?

Ima scared!

Well, one reason was panic.  First, it was AIG and other financial firms.  Next came the automakers on the brink of bankruptcy.  People saw their mutual funds’ value going into the tank, and decided to bail before they lost everything.  One 70-year-old retiree explained:

“My retired friends who had all CDs and gold, and they were still making money, and my investments just kept going and going,” she said. “I thought: I can’t afford to lose all this.”

She should have waited.  The Dow has surged 26% since it bottomed out in early March.  Like Axl Rose sang, “Just a little patience.”  But some investors had bigger problems, like negative cash flow:

Josh Caucutt of Lakewood, Colo., cashed out his individual retirement account in early March to help pay the $1,200-a-month maintenance costs on his unsold home in Wisconsin. “I knew exactly what I was doing,” said the 34-year-old father of three. “By no means am I convinced I did the right thing. But we needed this money immediately. And there wasn’t much to indicate that things were going to change.”

Another victim of the housing bubble, no doubt. Tsk tsk.  He missed out on some serious bargain shopping for stocks.  So did anyone else who tried to time the market and miscalculated:

The Archambeaults…sold anyway, reducing their stock holdings to 20% from 85%. They sold in November, which hasn’t hurt them since the market is now roughly flat for 2009.  Still, Mr. Archambeault said it is tough to watch the rally pass him by. He is thinking of putting half the money back into the stock market in coming months.

What’s the line from Dune, “Fear is the mind killer.” People that don’t understand the fluctuations of the stock market, and don’t have the stomach for it, can make some ill-informed decisions.  But, not even financial advisers are immune from panic:

Not everybody who sold earlier this year considers it a mistake. Holly Hunter, a financial adviser in Portsmouth, N.H., advised many of her clients to sell, first in the summer of 2007, then again in February of this year.  “My folks need income,” she said. “They need to know they can pay their bills….There is no waiting time for things to come back around.”

Two-thirds of her clients were retirees.  She had them in stocks for 60%.  Did she ever hear of asset allocation?  And they pay this woman for financial advice?  Here’s another pearl of wisdom:

Only two have since questioned whether selling was the right move. “The downside would have been horrific,” she said. “What if we were at 3000 now? Selling at 6500 would have been brilliant. And you don’t know that at the time of the decision.”

What if?  Well, a financial adviser should know that the market will have wild swings.  If you have enough years until retirement, you can just hang on and ride it out. To quote Warren Buffett again:

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

But if you’re a retiree, you have no business trusting your nest egg to an unstable market.  They should have gradually made the move out of equities long before the current crisis.  February was the wrong time to sell.  The horse was already out of the barn by then, or the corral.  Whatever.

My point is: don’t do what these knuckleheads did.  Read.  Get all the information you can.  Talk to someone who;s a successful investor, and set up a strategy that includes what you would do in a bear market.  And by all means, don’t panic!

Read the original article: Many Bought Shares High, Sold Low

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