Why Do Investors Seem to Hate It When Their Stocks Go On Sale?

…Most people execute a rather sane and simple strategy when purchasing most things. Intelligent shoppers are always on the lookout for bargains or sales and most have a general idea of what the merchandise they are desirous of purchasing is worth. As a result, they are excited and appreciative when they see merchandise they want selling at a bargain price. Ironically, this seems to hold true for most every shopper except most common stock shoppers. I have long found it curious that common stock investors seem to hate it when their stocks go on sale.

Many times in the past I have utilized the following metaphor to illustrate my frustration with many common stock shoppers that I have personally talked to. Imagine for a moment that you pulled up to your favorite retail store and noticed that the parking lot was full. As a result, you had to circle the lot many times just to find a place to park. When you finally entered the store, you noticed that every aisle was jam-packed with people with full shopping carts feverishly pulling merchandise off the shelves. It could only be described as a shopping frenzy.

At that moment, something odd happened. The manager of the store got on the intercom and announced to all the customers in the store that the store wanted to reward their loyal shoppers. For the next hour the manager said everything in the store is going to be marked down 50% off. Before the store manager’s words were barely out of his mouth, you noticed something remarkable. Every shopper in the store instantly abandoned their already-full shopping carts and ran out to their cars and into the parking lot.

Fortunately, the store manager immediately came to his senses and made another announcement through speakers located in the parking lot area. He apologized profusely, rescinded his half off sale, and further announced that if the shoppers would come back the price of everything in the store would be marked up 50% above what the price was when the shoppers were in their shopping frenzy. With this announcement, the shoppers jumped out of their cars and stormed the doors of the store and once again engaged in a buying frenzy that was even more intense than it was just before they left.

If you think about it, the stock market is the only market on earth where shoppers routinely behave this way. When stock prices are high and inflated, people can’t seem to get enough overvalued securities to add to their portfolios. However, when those same companies go on sale at significant discounts to true value, it’s as if investors are saying they will not by that cheap stuff.

I can only surmise that common stock shoppers behave this way for two important reasons.

1. First of all, they are heavily influenced, and even emotionally traumatized when the price of the stock they own is dropping. Consequently, they must believe that someone knows more than they do about the stock and this engenders fear and anxiety.
2. In my opinion, the second reason might be that they are over-complicating and/or over-thinking their analysis.

My experience gives me great confidence that the first reason is valid, and anecdotal experience from talking with numerous investors also suggests that my second reason plays a major role…

Whether we like it or not, the undeniable reality of investing in the stock market is that there will always be bear and bull markets but, most importantly, each bear market inevitably ends by turning into a bull market, and vice versa.

[The original article was written by Chuck Carnevale (FastGraph.com) and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read. “Follow the munKNEE” via Twitter and/or Facebook.]