This week’s market selloff has made a lot of people itchy to trade stocks. They want to sell before things get worse or, alternatively, maybe pick up some bargains. David Kass, professor of the practice at the University of Maryland’s Robert H. Smith School of Business, explains why you should resist the impulse to guess where the market is headed.
Q. People who own stocks are watching the markets tumble and want to do something. Should they resist that urge?
A. The natural desire to follow the crowd — herd instinct — can be very detrimental to investment performance over the long run. For example, during the panic selling that occurred at the market open Monday, shares of many of the finest companies in the world were marked down substantially. The supply of shares being sold overwhelmed the demand from buyers. Shares of Apple Inc. (AAPL) traded as low as $92.00 soon after the market opened, a discount of 17 percent from Friday’s close of $105.76. The shares subsequently recovered a few hours later, with its price exceeding its previous close. Similarly, J.P. Morgan Chase (JPM), which closed at $63.60 on Friday, traded as low as $50.07 on Monday morning, a discount of 22 percent, before recovering virtually all of its decline. Finally, Kraft Heinz Company (KHC) traded as low as $61.42 Monday morning, a 15 percent decline below its previous day’s close of $72.27, before fully recovering.
Short-term traders and market timers are more likely to have their investment decisions dictated by their emotions of fear or greed than sound judgment and analysis performed over time with long-run goals in mind. A buy-and-hold strategy is less likely to be influenced by the behavior of others.
Q. More generally — apart from unusual episodes like the ones that ended last week and began this one — is it possible to monitor the market carefully to buy low and sell high?Â
