November 20, 2007

Buy low....Sell high

Buying low and selling high is the simplest notion of investing and it is one of the most given advice to investors, beginners and seasoned alike. So lets look at some market categories performance from the period from 1995 to date. The table below illustrates the cumulative price appreciation for the period (not including dividends):

market2001- 2007.1995-2000
RUS 200041.46%72.24%
Emerging Markets138.81%-38.91%
EFEA Index13%61%
DJ Commodities Index49.03%16.18%
DJ REITS Index218%82%

Source: yahoo finance data

It is interesting to see that the highest appreciated category in 1995-2000 period was the poorest performing category in the subsequent period. The NASDAQ appreciated by more than 125% by the end of 2000; it was one of the poorest performance to date. While emerging markets where it lost 38% to gain a whopping 138% in the subsequent period. Typically assets will not forever continue to under perform or over perform. cycle will reverse and the weak performers will be tomorrow strong performers.

This is probably not earth shattering news, so why investors can not make it work. Well imagine you are a portfolio manager who wanted to liquidate his holding in the NASDAQ in 1999 to pour it in Emerging Markets. I do not think he will have a job for long. Imagine your self seeing your high tech holdings double in 4 years, can you sell to put it in volatile and money loosing asset category. Investing is easier than it seems but human psychology make it that more money loosing venture.

So what to do here, dump the Emerging Markets, REITS and commodities and buy the US, NASDAQ and EFEA. Will you be able to pull the trigger?

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