It never ceases to amaze me how keen novice investors are to buy investments when the markets are high. When the markets fall and bargains abound, the same investors steer clear for some sort of mis-guided fear.
It’s a fundamental flaw in our thinking that means people buy investments for emotional, not rational reasons. For example, if we meet someone at a BBQ that has made a fortune thanks to property values rising in the past three years, we want to buy property and repeat their success – even thought the horse has already bolted in terms of prices.
According to the science of behavioural finance, that’s because the human brain tends to believe that current trends will continue into the future. So an investment that has performed well, will automatically do so in the future and vice versa.
On the other hand the so-called "contrarian" investors understand the failings of investor psychology and make a lot of money out of it.
"It takes a lot of fortitude to go against the grain" says real estate investment author and seminar presenter Dolf de Roos. Yet to do really well in almost any financial market you need to buy when everyone else is selling.
When I called a number of stock market commentators this week about the falls in the market, all they could talk about was, which stocks are a bargain now and which aren’t – not doom and gloom. Even American shares might be good buying now despite all the bad news stories about the credit crunch.
So instead of thinking that the stock market has taken a dive and therefore funds and shares are bad buying. It’s better to think: the market has fallen, ‘there must be some bargains out there and I’m going to find them’.
Although it’s nigh impossible to time markets correctly, they do overshoot and undershoot. So if we’re at the bottom of the curve right now, stocks are probably undervalued. The same can’t be said of New Zealand property prices.
So who has bought shares or funds in the past few weeks and why?
If you want to find out a bit more about how contrarian investors think, take a look at some of these You Tube clips: