Canadians Love Sales� Except When It Comes To Investments

Allan Small Canadians love sales. Many people will happily purchase something in a store that is 30 per cent off and talk about what a great bargain they found. How many times have you turned to hear a friend or relative talk about a great item they purchased on sale? They bought a new outfit or a flat-screen TV and now they’re proudly showing it to you, perhaps even boasting about how much money they were able to save. They often feel extremely lucky that they bought something for such a great price.

But there is one exception to this love of sales – when it comes to investments that are on “sale”, people tend to do the opposite and often take a pass. In fact, they’ll often wait until the price begins to rise before they end up buying it at a higher price (which isn’t what they want to be doing).

In the investing world, where the goal is to buy low and sell high, why are investors so reluctant to buy investments that are on sale?

Part of the reason is fear and part may be due to a lack of clarity. It can be nerve-wracking to buy an investment when it is at a low point and all that you hear about the investment seems negative. In fact, many investors will actually wait to see some positive movement before they’ll consider buying. They’re looking for some kind of confirmation that the investment will be moving higher in the future. The challenge of waiting for confirmation is they are likely missing a good time to buy.

The key to investing, in my opinion, is to try and keep emotion out of your investment decision-making.

Understand The Cycle Of Market Emotions

You’ve likely seen charts like this previously. In many respects, it’s shaped like a roller coaster, with an initial climb higher at the beginning as an investment climbs and emotions move from Optimism to Euphoria, which is at the crest of the hill – this being the period of maximum financial risk. Then, just like a roller coaster, the curve drops down with emotions transforming from anxiety, to fear, to despondency and depression at the trough, before things begin to rise again. The bottom of the cycle between despondence and depression is the point of maximum financial opportunity. This chart demonstrates why people tend to buy and sell at the wrong times because it is counter-intuitive. It takes someone with an “iron stomach” to purchase an equity investment (i.e., stock) when the market is predicting doom and gloom.

Look At The Investment’s Fundamentals

There are investing tools to help you analyze an investment. Smart investors look for investments that are “cheap” by historical standards and trading at low multiples. Many investors look to the P/E ratio (price of the stock versus its earnings) as a measuring stick to find good valued-growth investments. You also want to look at the fundamentals to see if there truly is a reason that the company is trading at lower levels. What is the company’s track record and earnings? Are the fundamentals solid?

Look Beyond The Individual Company

It’s often worthwhile to check out not just that company but the overall sector. What are the P/E ratios like with that company’s peers and competitors? Is the sector itself undervalued or in some type of transition?

Active Investing Is A Key To Success

In these modern markets, volatility has become part of the norm. Gone are the days when investors can take a buy-and-hold approach. If you look at the Dow Jones Industrial Average from 2000 to 2010, you’ll see that the index passed the 10,000 mark at least six times. If you had followed a buy-and-hold strategy, you would have seen little in the way of gains owning an investment which followed the index over this period. However, if you had been an active investor, selling all or part of your investment once they had reached pre-established targets (as part of your investing plan), you could have done very well. You could capitalize on the gains and sold investments as they passed a target to avoid the dips in the market.

Don’t Hesitate To Turn To Outside Help

Not everyone has the time and inclination to follow the markets so closely. The market is never static and it can be very helpful to turn to an outside expert who is intimately familiar with the markets. It is one reason why many people turn to an investment advisor to talk about how you can make the most out of opportunities, while also minimizing risk.

Allan Small is the Senior Investment Advisor with Allan Small Financial Group with HollisWealth, a Division of Scotia Capital Inc. (www.allansmall.com) as well as the author of How To Profit When Investors Are Scared.

This article was prepared solely by Allan Small, registered representative of HollisWealth ® (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views, including recommendations expressed in this article are those of Allan Small and not those of HollisWealth. ® Registered Trademark of The Bank of Nova Scotia, used under license. Allan Small Financial Group is a personal trade name of Allan Small.