Don’t be a Lemming

On Wall Street they used to have a negative indicator they called the “Shoe Shine Boy Indicator.”  (A negative indicator is a parameter which indicates a sell signal when it rises and a buy signal when it falls).  The Show Shine Boy Indicator worked like this:  When the boys who would shine the shoes of the traders in the exchanges started talking about investing and were buying stocks, it was time to sell.

To understand why, one must understand the mechanics of the market.  Stocks rise in price when the people buying shares are willing to pay more for the shares than the price at which they were last traded.  Conversely, they fall when people are willing to sell them for less.  When the shoe shine boys were trading stocks, it had meant that pretty much everyone who was going to buy shares had bought them.  People were mortgaged to the hilt and did not have any money to push shares higher.  Furthermore, if the price did start to drop, people had a lot of money in the market and would be willing to take a slight loss to prevent a large loss, so they would sell at a lower price and push share prices lower.  No one would want to buy, seeing the price falling and worrying that it could fall further – after all, who want’s to buy today when the price may be lower tomorrow?  This would feed on itself, with the final sellers just asking to get out at any price.  This would continue until the only people left holding shares were not willing to sell at the prices offered.  At that point people would start to look at the price of the shares, decide that they were a bargain, and the shares would stabilize.

To avoid being stampeded by the herd one must not follow the crowd.  By its very definition the crowd cannot get a good price for a stock on the buy or the sell side.  The worst thing one can do is be the last one to the party – the greatest idiot – and be left holding the balloon when it bursts.  If everyone is talking about a certain investment and have been for a while, it is not wise to buy in.  Remember that people were looking to fudn their children’s college with beanie babie investments in the 1980’s – where are those beanie babies now?

Right now everyone is talking about how far gold prices have risen.  They point to this and say what a great investment gold has been – wouldn’t you want to get in to this investment?  If gold is such a great investment right now, why are people who are supposedly “in-the-know” paying all of this money for advertising to sell it to you?  Wouldn’t they be trying to keep the secret so that they could buy as much as they could at lower prices? 

It is true that gold has performed well due to uncertainty in the markets and other factors.  Because it has performed well, however, it is at a significantly higher price than it was just a few years ago.  In order for an investor to continue to make money, new individuals need to be willing to pay even higher prices than we see now, which are already at historic highs.  Just how much further could you expect prices to rise?

Don’t be a lemming.  The time to buy an investment is before the crowd has discovered it, not when it is all the rage.  It may take a while for this bubble to burst and prices may well go higher, particularly if there is inflation (in which case the price is not actually higher).  Eventually, however, the bubble will burst and you don’t want to be sitting on a pile of gold, paying safe rental fees for twenty years, waiting for inflation to bring the price back to what you paid for it.

To ask a question, email or leave the question in a comment for this blog.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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