Unfortunately,
due to millions of years of evolution, human beings make absolutely terrible
investors. It appears that most investors seem to have a good memory for very
long term trends and very short term trends but for some reason they seem to
forget about the intermediate term trends. As a result of this they lose
money!
For
example:
Long Term
From
1980 to 2000 a long term trend in the stock market catapulted the general
stock markets like the Dow Jones and NASDAQ to dizzying heights. The massive
long term trend was powerful, profitable and hard to forget about. Ever since
the NASDAQ bubble popped in 2000 many investors have been adding to their
beloved tech stock positions trying to 'dollar cost average' for the next
wave up. Eleven years later these investors continue to rationalize why their
buy and hold strategy will be paying off any year now.
Real-estate
and its bull market is yet another example of investors remembering a long
term trend and expecting the market to go right back to "normal"
any quarter now. The same psychology kept investors away from gold and silver
in 2000 because it had been a poor performer for the previous 20 years.
Although precious metals are in the lime light today, the same was not true
even a few years ago.
Short Term
On the
other extreme we get the short term, tunnel vision investor who seems to
forget everything prior to a few days ago. In this case I am not talking
about the very short term "Day Trader" but rather I am talking
about the investor who loses sight over where they just came from. This
investor will get so caught up in a profitable trade that they will continue
to buy more and more until they eventually sell out from what inevitably
becomes an unprofitable drop. In other words this investor will turn
profitable trades into unprofitable trades because they lose perspective on
the bigger picture and rarely take profits.
So why
don't investors remember and pay attention to the intermediate term trend? To
be honest we aren't really interested in why; the answer probably has something
to do with evolution and survival. We are interested in recognizing the
weakness so that we can profit from it and outperform the market.
Take a
look at the price of Silver from a daily perspective:
From a
daily perspective silver really looks like it has pulled back. Perhaps this
is a great low risk buying opportunity. These comments are being typed
"Tongue- in-cheek" as we try to illustrate our point about
perspective and market swings. The following charts will clarify what we mean
by this.
Let's
look at the price of silver and this same potential buy point from a little
bit larger perspective:
As one
can clearly see the pullback in the daily chart is nothing more than a tiny
blip in the overall move.
Again
we can see that the seemingly great buying opportunity from the up close view
may actually be a little on the "not so low risk" side of things.
Now
let's look at the long term price of silver from a Monthly perspective.
This
chart clearly illustrates how significant the recent move of silver has been
compared to its historical price action. From a monthly perspective we can
clearly see the parabolic spike action. This is much harder to see from the
close up daily chart.
Before
we continue we would like to be totally clear that we are extremely strong
Gold and Silver bulls. It is our opinion that the price of Silver and Gold
will be many multiples of their current prices in the future. We are by no
means trying to suggest that the silver and gold bull market is over but we
are trying to raise a point about intermediate term market swings.
We
believe that investors should ask themselves:
- Do I
find myself feeling like I am missing out and I should buy more
positions in precious metals so that I don't "miss the boat"?
- Is
it becoming easier and easier to add to my positions because I am so
certain these investments have to go higher?
- Am I
starting to count how much money I will make in my precious metals
investments without regard to how much money I may lose?
Recently
we have observed a "professional" precious metals advisor
explaining that investors should buy a position in silver and gold right now
just so that they don't "miss the boat" in this bull market.
Interestingly we didn't observe such a comment in November of 2008 when
silver was at $9.00.
In our
opinion the above observations are warning signs that things are getting a little
over heated in this sector. We do not mean to suggest that investors should
sell all of their precious metals positions because we are predicting a top
in the market. Interestingly we believe that an even larger spike in the
price of silver is a very real possibility. However, we are trying to bring
to light a common investor mistake and the warning signs that we see in the
current bull market. The warning signs are almost always there for those who
are willing to pay attention to them.
Michael Kilbach
Editor
Investmentscore.com
Michel Kilbach is
the President and Editor or www.investmentscore.com,
an online publication designed to show investors how to make profitable entry
and exit trading decisions in high growth potential investments.
Investmentscore uses a unique scoring system as a visual guide to assist
investors in making lower risk / higher reward trades.
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