Sell Your Pigs When People Want To Buy Them
My grand father used to raise a lot of hogs. He had observed the market and discovered that most people lost money on them. As he watched, he observed that hogs reproduce about twice a year. Furthermore, they have large litters, and thus can easily flood the market.
When prices are going down, everyone is trying to sell pigs to stop their losses. This pushes the market even lower, increasing pressure to sell. As the surplus pigs are used up, the price begins to rise. When it reaches a point where it is profitable some begin to buy and breed more stock. As the price rises higher, their profits grow, and others jump on the band wagon. The market becomes saturated and prices begin to fall. Those late comers paid high prices and now they fear they will lose if they delay and the cycle starts again.
Granddad realized that if everyone was wanting to get pigs to get in on the high prices, the price would soon be forced down. If everyone had sold out , there would soon begin to be demand, driving prices back up. By taking a contrarian position, increasing the herd when prices were low, and selling out when they reached profitable levels, he was able to consistently make money on the hogs.
Later. He realized that the same held for the cattle market and was able to make more consistent profits on his cattle well, although the swings were slower and less easily predicted. Because of the prolific reproduction of hogs, and the actual number of people eating pork was fairly consistent, the cycle tended to be about every two years. Cattle required six to eight years to make the same cycle because of the lower reproduction rates.
Investing in the Stock Market is some what different. There is no consistent demand for a certain stock and the amount of stock available is largely determined by how much people want to sell, rather than the rate at which more can be produced. This makes predicting market swings far more difficult.
Just as people wanted to buy hogs when the price was going up, people want to buy stocks when the price is going up. Sellers will want to hold on until they make a sizeable profit, reducing supply. When the demand gets too high prices reach a level where people cant afford to buy and reducing demand, which drives to price back down and those who bought at the peak become desperate to sell, driving prices down even faster.
Since the demand is largely based on peoples perception of the possibility of profit rather than a real need, it is far more erratic, making the market far more volatile. One cannot time the cycles to make consistent profit.
Nevertheless, the principle of selling when many want to buy and buying when most are desperate to sell is a proven strategy. While one will seldom sell at the peak, as one counselor said, "you can't lose money taking a profit." If you buy stocks at a level where they are a good value, they will pay off.
I was interested to note that some professional advisors are recommending selling off stocks in the present environment, based on the high profits and the number of people involved. As one said, "We are starting to run out of buyers." In other words, demand is slackening, which will cause prices to fall for many stocks. Don't try to time the market. You'll almost always be wrong. It'll be better to settle for a smaller profit than to risk a huge loss.
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