Buy high, sell higher, the hardest way to invest or trade?

I came across an interesting article today which tells us a lot about our own psychology when it comes to investing or trading. Although the article itself is not about investor or trader psychology, it suggests that the way our mind works isn't always in our best interest when it comes to the investments we make. We like to buy cheap, we like to buy something undervalued and often we are tempted to catch falling knives. In short, we think that cheap is the way to go and look for strategies that fill that desire. Of course, it can work, value investing has its place. Finding undervalued, unloved sectors or companies can pay big dividends if you are prepared to wait, sometimes many years, while avoiding the dreaded value "traps" that the market lays for us.

However, there is another way, but it is a way that most investors and traders almost intuitively try to avoid, buy high and sell higher.

No one likes to buy things that are expensive, that look overpriced, that keep going up and up, sometimes with no logic to it, accept they are going up.

Here are some quotes from the article;

I want to share with you an incredibly simple strategy today... one that has consistently crushed the markets.

It has worked for decades.

 

It has delivered higher returns than the stock market – more importantly, with less risk than the stock market (less volatility).

 

It's nothing weird or bizarre. It's a simple idea. And the results seem too good to be true... but they are true.

 

The system is simple: Buy what's working.  

 

It turned $10,000 into $573 million over the last nine decades. And it will keep compounding wealth, both in individual stocks and among asset classes, for decades to come.

It goes on;

In his book What Works on Wall Street, James O'Shaughnessy studied the numbers going back to 1925. The results are just incredible...

If you bought the worst-performing 10% of stocks over the previous six months, you would have outperformed the market just once since the end of World War II. After the great bust in 2008, the worst performers briefly turned into the best performers when the market recovered... But that was the only time it happened.

The story is crazy-different when you look at the best performers instead...

Starting in 1925, you would have turned $10,000 into $573 million simply by buying the best-performing 10% of stocks over the previous six months, holding, and rebalancing monthly.

The message from history is painfully obvious... Buy the winners and don't buy the losers.

http://www.dailywealth.com/2145/The-Simplest-Successful-Investment-System-You-Can-Imagine

You could probably find the same for UK stocks or elsewhere. Shares that are in an uptrend are usually going up for a reason, just as shares in a downtrend go down for a reason.

The problem is we fear that if we buy into an uptrend it must be due a fall, or it looks too expensive you wait for the correction that never comes. The trend is bound to end at some stage and when it does it can correct sharply, but the key should be to have an exit strategy for when the trend ends.

But as we like to buy cheap, I suspect most people are psychologically tuned to buying falling knives and shares that are getting cheaper than those going to higher highs, despite the fact that the latter strategy is the one that historically produces the winners. After all, prices go higher because the market is buying, just as they go lower when they are selling. Following the herd can be a good thing if you know that eventually the journey you are on may end. Convincing yourself to do it and ride the trend is the difficult bit.