Topic: Bulls make money, Bears make money, Pigs get slaughtered (Read 680 times)

Hope many here will be able to relate to this and learn from it:

"Bulls make money, bears make money, pigs get slaughtered" is a pretty simple saying that conveys more than it first appears. Its meaning is simply this, do not let greed affect your judgment. While this is simple its applications are many.

There are several ways the stock market punishes excessive greed. Among the ways the market punishes greed is through churn caused by commissions. The mere act of buying and selling can rack up huge costs for investors, including lost performance due to loss of capital and higher taxes (the federal gov't counts each transaction you towards your capital gains). Thus as Warren Buffett has famously advocated the ideal holding time is forever, as you never incur transaction or tax costs.

Another way the market can punish greed is through unreasonable expectations. An investor who is doing well might expect to do even better in the future ignoring reversion to the mean. This may cause the investor to hold onto stocks past the optimal time to sell them or overpay for new holdings. This mistake commonly occurs in bubbles.

A third way the market can punish is by those who chase performance. Investors who buy what has done well recently (hot sectors e.g.) can often find that they underperform the market. Yesterday's biggest winners are often not tomorrow's.

As you can see greed kills, it can kill an investor's returns by making them act in haste. The best investor is the one who is intellectually flexible and dispassionate in analysis when it comes to investing. As Warren Buffet has said the critical determinant in an investor's success is not intelligence or skill but temperament.