the prospectus andpay special attention to the section called ‘‘Shareholder Fees,’’where funds are required to explain all of their fees and charges.Any side-by-side comparison is complicated because fee structuresvary so widely. Some fees to be aware of:1. Sales load is applicable when you buy fund shares through abroker or ﬁnancial planner. The sales load, also called sales charge
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load, is a commission you pay to the broker. The load usually is 8.5percent, although funds may charge less. The problem with salesload is that it comes off the top. For every $100 you invest (assuming maximum load), $8.50 goes to a salesperson’s commission andonly $91.50 goes into the investment. So in a fund not charging asales load, a 5 percent return represents $5.00 per $100. But tomake that $105 in a load fund you have to earn 14.75 percent,nearly three times more.$105.00  $91.50$13.50$13.50$91.5014.75%The sales load makes a signiﬁcant difference in matching noload fund returns. However, in studies comparing load and no-loadfunds, market performance is no different. To justify the sales load,commission-based advisers claim that their expertise in fund selection is worth the commission they are paid; but realistically, fewﬁnancial planners undertake the comparisons needed to make suchclaims.In addition to the ‘‘front-end sales load’’ described above (inwhich the commission is deducted before money is even placed inthe investment), some funds charge a ‘‘back-end sales load,’’ alsocalled a deferred sales load. This is paid when you redeem yourshares, so the commission comes out of accumulated funds ratherthan off the top. The most frequently used type is called the contingent deferred sales load, or CDSL. The amount charged dependson how long you hold onto your shares. The load fee declines foreach year you keep your fund shares, eventually falling to zero.Some mutual funds advertise that they are ‘‘no-load,’’ implyingthat investors will not be charged a fee. But here again, careful comparisons of the full range of fees is essential, because even a no-loadfund might assess additional fees given names like purchase fees,redemption fees, exchange fees, or account fees. None of these areclassiﬁed as a ‘‘sales load,’’ and as long as the combination of allextra fees does not exceed 0.25 percent of the fund’s net asset value,the fund is still allowed to call itself a no-load fund.
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2. Yet another charge is the redemption fee, which is chargedwhenever investors sell (redeem) their shares, in total or a portionof the total. This is not treated as a sales load by name, even thoughit is deducted in the same manner as a back-end sales load. Butwhereas a back-end sales load goes to a broker or ﬁnancial planner,the redemption fee is ostensibly assessed for costs the fund has topay for the redemption. The limit of redemption fees is 2 percentunder Securities and Exchange Commission (SEC) guidelines.3. Other fees: Mutual funds have cleverly deﬁned and craftedtheir fee structures to avoid calling them sales load or expense fees.An exchange fee is assessed by some mutual funds if and when investors transfer funds to another fund within the same group, or‘‘family’’ of funds. An account fee is charged to maintain an accountin some cases, which is increasingly difﬁcult to justify in an automated age. The account fee often is assessed on accounts whosevalue falls below a speciﬁed dollar amount. A purchase fee is chargedwhen you buy shares. Not called a sales load but assessed in thesame way, the money goes to the fund rather than to a broker.4. Operating expense fees are charged by virtually all mutualfunds and come in a variety of forms. The management fee is thefee paid out of the fund’s asset to compensate its professional managers, and an administrative fee is paid to an investment adviser.Each shareholder is assessed an annual portion of the overall feepaid.5. Some funds also charge a 12b-1 fee, named for the SEC ruleauthorizing these special charges. It is also called a ‘‘distributionfee,’’ and covers the costs of paying for advertising and marketingthe fund’s shares. This includes placing actual ads as well as printing and mailing prospectuses and marketing and sales literature.The maximum 12b-1 charge per year cannot exceed 0.75 percentof average net assets per year, under the rules of the National Association of Securities Dealers (NASD). Essentially, a 12b-1 fee requires its investors to pay the cost of advertising the fund andattracting more investors. Some plans include a secondary shareholder service fee, which covers the cost of responding to investorinquiries. Some funds charge this shareholder service fee without
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calling it a 12b-1 fee. The maximum is 0.25 percent per year underNASD rules.6. Other expenses can also be charged by funds. In addition tothe fees listed above, these may include custodial expenses, legal andaccounting expenses, transfer agent expenses, and administrativeexpenses.As you can see, an array of fees may be disclosed or hidden inthe ﬁne print of a prospectus, a document most people don’t read.Many people limit their selection to no-load funds only—those thatdo not assess a load fee—but may actually be paying a range of feeswithout even being aware of them. The monthly or annual statements issued by funds can be very difﬁcult to read, and many investors do not know how to ﬁnd the total of all the fees they are paying.The fee table in the prospectus includes the ‘‘total annual fund operating expenses,’’ which is the fund’s annual operating expenses,expressed as a percentage of average net assets.However, it remains true that comparing fees between funds isvery difﬁcult, given the variety of fee names and structure of the feesthemselves. And on the basis of performance, the net outcomemakes the comparison even more difﬁcult. For example, when youhear that a fund’s 10-year return to investors was 10 percent, whatdoes that mean? Is this based on returns before or after expenses?How does that fund compare to other funds charging more fees orfewer fees?Finding Help in Making Comparisons: The best way to make valid comparisons between different funds is to undergo a side-by-side comparison with all fees included. A ‘‘mutual fund expenses analyzer’’ is free andlocated at http://apps.ﬁnra.org/Investor_Information/EA/1/mfetf.aspx.Another one, offered free on the SEC Web site, is located at http://www.sec.gov/investor/tools/mfcc/holding-period.htm.
In addition to the web of fees mutual funds charge, anothermethod for judging and comparing them is through analysis of theirnet asset value (NAV). This is the current market value of all assets,
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minus liabilities, divided by the total shares of the fund. You can ﬁndNAV in daily listings in ﬁnancial papers or investment sites online.Most funds are referred to as open-end funds, meaning they willaccept an unlimited number of additional investors and do not impose a limit. A closed-end fund, in comparison, has a speciﬁc dollarvalue limit, and when closed will not accept any new investors (however, in many such funds, existing investors are allowed to buy additional shares). Shares can be purchased by new investors only onthe exchanges, and only when they are offered by existing investors,rather than simply sold by the fund itself. In an open-end fund, theNAV reﬂects speciﬁc net market value of the portfolio minus whatthe fund owes to others. But in a closed-end fund, NAV might tradeabove the tangible value of the company. When shares are valued ata premium above actual tangible value, it implies that investors perceive growth potential in the future based on the fund’s portfolioand its management.
Classiﬁcations of FundsIn addition to distinguishing funds by fee structure, you need todecide which type of fund you want. This distinction should bebased on the types of investments included in the fund’s portfolio,as well as its investment objectives.Types of funds include the following:1. Equity funds invest in stocks and take equity positions inlisted companies. As ‘‘institutional’’ investors, equity funds oftenpurchase large blocks of stock rather than only a few hundredshares. Because the majority of dollar value in the market is represented by institutional holdings and trades, large institutions (mutual funds, insurance companies, and pension funds, for example)have a lot of inﬂuence on price movement in speciﬁc stocks.2. Fixed income funds invest in two kinds of securities. Theybuy bonds to generate interest income for investors and a limitedamount of capital gains. For example, when bonds are sold in themarket at a discount (meaning below their face value), they are re-
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deemed at full par value; the difference is a capital gain. An incomefund may also invest in equity positions to generate dividends. Someﬁxed income funds, also called bond funds, may also specialize. Forexample, they may invest only in high-yielding bonds (junk bonds)that while yielding higher than market rates also represent greatermarket risks.3. A money market fund limits its investments to the moneymarket, including certiﬁcates of deposit and other short-term,interest-bearing instruments. These include instruments like U.S.Treasury bills, bankers’ acceptance, and commercial paper. Thesekinds of instruments represent the cost of banks and other institutions lending money to each other or providing ﬁnancial guaranteesin very short periods of time. Funds specializing in this market carryportfolios of various money market instruments and pay interest toshareholders.4. A specialty fund can be designed to emphasize equity, debt,or money market instruments, but has a speciﬁc kind of distinctionbeyond the broader classiﬁcations. For example, a fund may specialize in new, fast-growing companies, a speciﬁc market sector, acountry or region, or even environmentally conscious companies(so-called ‘‘green’’ funds). Specialization may come in a variety offorms, often designed to hedge against currency or precious metalweakness in one country, or to take advantage of emerging economic conditions internationally. Even greater specialization isfound in mutual funds with very narrow investment criteria. Forexample, global funds (also called international funds or foreignfunds) focus primarily on companies outside of the United States.5. Balanced funds provide investors with a combination of features on two levels.First is market risk versus safety; in other words, a balance exists between potential income and growth on one hand versus safetyof capital on the other. The balance may also refer to the use ofdifferent kinds of instruments and may be called an asset allocationbalance fund. A portion is invested in stocks and a portion in bonds,and may be more ﬁnely distinguished by the type of stocks employed. For example, some portion may be allocated to ﬁnancial
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markets or real estate company stocks, creating allocation betweenstocks, real estate, and debt.6. Another way to deﬁne and distinguish mutual funds is by theasset value of companies in their portfolios. A large-cap fund limitsitself to stocks of companies with very strong ﬁnancial value, meaning a conservative rate of return and lower than average chances oflarge-scale losses in stock value. In comparison, mid-cap and smallcap funds select companies with less capital value but greatergrowth potential.7. Index funds invest in a cross-section of stocks found in speciﬁc market indices such as the S&P 500 or Dow Jones IndustrialAverage (DJIA). For example, buying shares in a DJIA index fundwould provide investors with a portion of ownership in all 30 stockson the DJIA, and buying shares in an S&P 500 mutual fund wouldgive ownership proportional shares in all 500 of those companies.Logically, it would seem prudent to limit investment to the top performing companies in an index, and some specialized mutual fundsdo just that. Investors who opt for index mutual funds want thebroad exposure without the diversiﬁcation and management problems involved with buying shares of many companies; the indexfund provides an easy and affordable solution.8. Tax-free bond funds are suitable for those paying very hightax rates. Some bonds, speciﬁcally municipal bonds, are exemptfrom income taxes. In analyzing a bond fund a valid comparisonshould be made on an after-tax basis. In other words, the tax-freeincome from a bond fund has to be compared to the income from ataxable mutual fund after taxes are paid.Fund selection should also be made on the basis of investmentobjective and ﬁnancial status. For example, you would not want alower-yielding tax-free bond fund if your tax rate is low. A growthfund is designed to emphasize investment in companies expected tohave exceptional growth in the future. This is designed to providegreater than average capital gains. A value fund seeks stocks thatcan be bought at a discount but are exceptionally well managed andexpected to produce higher than average returns over many years.
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An income fund focuses on higher than average dividend yields,often including limitation to stocks whose dividends have grownevery year over many years (dividend achievers).A fund promising to focus on capital preservation seeks investments that will beat inﬂation and taxes, but will not take any risksthat would lead to substantial market value decline. On the otherside of the risk spectrum, an aggressive growth fund is like the middle-of-the-road growth fund, but seeks much greater than averagegrowth. The investment objective is just that and not a promise offuture performance, an important point to keep in mind. Mutualfunds as a group have not outperformed market averages for themost part in past years, and ﬁnding the fund that is likely to outperform future markets is no easy task. It makes the most sense tofocus on funds that have shown consistent performance in manydifferent types of market conditions, and whose management communicates a speciﬁc, prudent investing policy with a proven trackrecord.
Other Conduit-Type InvestmentsBeyond the traditional mutual fund, a number of more specializedconduit investments offer an alternative to direct ownership ofstocks.Among these, the mortgage pool offers investments in securedreal estate mortgages. These are marketed by quasi-governmentagencies, which collectively are referred to as the real estate’s secondary market. These mortgage-backed securities are derived fromthe mortgage market itself. Lenders underwrite loans to homeowners, for example, and then sell those loans on the secondary market.Mortgages are packaged together and sold to investors. Differentforms of these mortgage pools are offered by the Government National Mortgage Association (GNMA), also known as ‘‘GinnieMae’’ (www.ginniemae.gov), which sells an instrument called theReal Estate Mortgage Investment Conduit (REMIC); by the FederalNational Mortgage Association (FNMA), or ‘‘Fannie Mae’’ (www.fanniemae.com), which offers REMICs and ‘‘mega-pool’’ invest-
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ments; and by the Federal Home Loan Mortgage Corporation(FHLMC), or ‘‘Freddie Mac’’ (www.freddiemac.com), which alsosells REMIC products. A variety of other organizations also offermortgage-backed and mortgage-debt securities.Another alternative to direct ownership involving real estate isthe real estate investment trust (REIT). A useful Web site providingan industry overview is the National Association of Real Estate Investment Trusts (NAREIT) at http://nareit.org. REIT shares selljust like shares of stock on public exchanges, making these amongthe few real estate investments with good liquidity. Many offer dividend reinvestment options, so you can choose to receive dividendsin additional partial shares instead of cash. This creates a compoundreturn on the REIT shares. REITs are specialized in the way theyinvest. An equity REIT is designed to buy property directly, usuallywithout carrying any debt. Thus, returns from rents are higher thanthey would be if it were necessary to pay interest on a mortgage.A mortgage REIT specializes in lending money to developers andbuilders. A hybrid REIT combines equity and mortgage features,taking up equity as well as debt positions. Most REITs specialize bytype of property. For example, some buy only industrial parks,whereas others focus on multifamily residential or commercialproperties. Another pooled investment is the limited partnership. Inthis real estate company, investors buy units of interest and generalpartners manage the company, picking properties and decidingwhen to hold or sell. There are several disadvantages to limited partnerships. First, you are ‘‘limited’’ in the sense that you have no sayover how the funds are managed. Second, if there are tax lossesthey are classiﬁed as ‘‘passive losses,’’ and cannot be claimed butmust be saved and applied against future ‘‘passive gains.’’ Third,when you want to sell limited partnership units, the secondary market value is not always based on actual value; the only way out is tosell units at a discount, often a deep discount, to companies set upspeciﬁcally to buy ‘‘used’’ shares of limited partnerships. For mostinvestors, limited partnerships offer little value compared to otherinvestment alternatives.Investing in real estate, which is often very illiquid, is most easilyaccomplished through REIT or other conduit venues. But for
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anyone seeking a lot of ﬂexibility, whether in real estate, stocks,currency investments, or speciﬁc sectors, one kind of mutualfund—the ETF—is especially designed for low cost and diversiﬁcation.
Exchange-Traded FundsAn exchange-traded fund, or ETF, is a variation on the more traditional model of a mutual fund with some important differences. Theportfolio of a traditional fund varies as management makes decisions, buying new issues and selling old ones. An ETF has a portfolio with a basket of stocks that is identiﬁed in advance and does notchange.A second important difference is that ETF shares are boughtand sold on the exchanges just like stocks. To buy or sell traditionalmutual fund shares you have to work directly with the fund, and thatinvariably means extra costs will be assessed and the transaction willtake time. Many ETFs also allow investors to transact options ontheir basket of stocks, which opens up many possibilities beyondsimply owning shares of the fund.Because there is no actual management of an ETF once its basket of stocks has been deﬁned, the costs of ETF investment are farlower as well. Of course, certain expenses will be charged and evenwith no actual management decisions, the ETF still has to be managed and expenses will apply, but these expenses are far lower thanthose in traditional mutual funds.Trading ETF shares is ﬂexible as well. You can buy or sell at anytime during the hours the stock exchange is open. The less ﬂexibletraditional mutual funds are always bought and sold based on valueat the end of each day. However, this is not always a beneﬁt. ETFsdon’t always trade at their net asset value (NAV), but could tradeabove or below the market value of the ETF holdings. In otherwords, ETF pricing is more like that of a stock and nothing liketraditional mutual funds.Beyond ETFs for stocks, an additional alternative is the ETN,or exchange-traded note. Many people ﬁnd bonds attractive but
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cannot afford the cost of trading in individual notes or the highcommissions of some bond funds. In an ETN, a basket of debt securities (notes, bonds, money market instruments) is made availablewith terms similar to the ETFs in the stock market.Getting ETF Information: The ETF is highly specialized by type of company, sector, region or country, or index. There are hundreds of ETFs tochoose from. Two valuable sites are Morningstar at http://www.morningstar.com/Cover/ETF.html?pgid
hec1tabetf, and Yahoo! Finance at
http://ﬁnance.yahoo.com/etf.
Another Look at OptionsDirect ownership of stocks or utilizing mutual funds or ETFs arethe most popular and safest methods of investing for most people.Interest in the stock market invariably leads new investors to theseavenues. However, it is also useful, especially for those who havegained some seasoning in the market, to continue thinking aboutoptions as tools for managing a portfolio: reducing risk by protecting paper proﬁts (buying puts), taking advantage of price dips (buying calls), or creating additional income with no added market risk(writing covered calls).Additional uses of options appeal to many investors. If you wantto use a small portion of your available capital to speculate, especially if you see an opportunity developing, options are a great alternative to buying additional stock. Most people are frustrated,because with limited capital resources they cannot take advantageof all the bargain prices they see in volatile markets. Options are theperfect solution. For relatively small amounts of cash (thus, lowermarket risks), you can control 100 shares of stock for each optionpurchased for a fraction of the cost of buying shares. Even if youwant to buy an odd lot, options are cheaper. Today, the cost ofbuying ﬁve or 10 shares of stock is not much greater than the costof trading in round lots of 100 shares. Consider this example: Let’ssay a stock was selling at $58–$60 per share and the market as awhole falls. The stock drops to $50 and you think the price is going
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to rebound very quickly. But with only about $500 available, youcan only buy 10 shares, meaning you cannot take full advantage ofthe price decline. However, you could buy a call option for about$500 that controls 100 shares of stock, potentially resulting in 10times more proﬁt over buying 10 shares.Pure speculation is not a wise move for most investors, at leastnot with large portions of a limited capital resource. But there aretimes when prices move quickly and, as is usually the case, to anexaggerated level. Markets tend to overreact. So if a triple-digitprice decline drags down a stock that is otherwise reasonablypriced, it is probable that the price will rebound. In these circumstances you can use options to create additional proﬁts from shortterm speculation.One technique that was popular in the past was day trading, atechnique of moving in and out of positions within a single day. Theday trader epitomized leverage by closing out all positions beforethe end of trading. A brokerage’s margin requirements are based onend-of-day positions, so it was possible to execute a high volume oftrades without getting any margin calls. This high-risk strategy created a lot of wealth in the past during times when the markets wererising, but also led to many large losses. When day traders were notable to close their positions at a proﬁt, brokerages often were leftwith huge losses.To offset this situation, the SEC enacted the pattern day traderrule in 2001. Under this rule, any time a trader moves in and out ofthe same position four or more times over ﬁve consecutive tradingdays they must leave at least $25,000 on deposit in their tradingaccounts in cash and equities. Also, if the number of round-trip(buy and sell) day trades exceed 6 percent of the total trades in anaccount, that person is also a pattern day trader. This also triggersthe requirement to have at least $25,000.A variation of day trading is swing trading. This is a pattern ofmoving in and out of positions in a three- to ﬁve-day period. It is aperfect solution to avoid the pattern day trader rule, and it is also agood way to make proﬁts from extremely short-term price swings.The swing trader recognizes that the market is ruled by emotions,speciﬁcally greed and fear. As a consequence of these emotions,
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price movements tend to be overreactions causing very short-term‘‘swing’’ opportunities. Prices are likely to move too far based onany current news. Swing traders move into long positions at thebottom of short-term swings and sell at the top. On the short side,they may sell short at the top in anticipation of the price retreatingand close at the bottom. However, by using options, short sellingcan be avoided. At the top, swing traders can buy puts instead ofselling stock.Using options enables swing traders to restrict themselves tolong positions only, which is much less risky than short selling. Buying either calls (at a price bottom) or puts (at a price top) limitsexposure and potential loss. It also provides effective leverage. Because a single option controls 100 shares of stock, swing traderscan expand their potential proﬁts to more actual shares of stock in ashort-term price movement, as well as to more companies. Becauseoptions cost much less than stock they are more ﬂexible.Swing traders look for speciﬁc patterns to time their trades.When a stock’s price follows a downtrend for three or more days,swing traders look for a purchase setup. A downtrend is deﬁned asa series of trading days where the daily closing price is lower, andwhere the trading range combines a series of progressively lowerlow prices and lower high prices. On the other side, swing traderslook for a price reversal after an uptrend. This is three or more daysof progressively higher closing prices, in which the daily tradingrange is a combination of progressively higher high and higher lowprices.The setup may involve one or more of the following patterns aswell. First is a narrow-range day, in which the distance between lowand high price is extremely small. Second is a reversal day, in whichthe established trend turns in the opposite direction. Third is a daywith exceptionally high volume, especially if the trading range is alsonarrow. The existence of any two of these set-up signals is strong;if all three are present (narrow-range day, reversal day, and highvolume), it is practically certain that the trend is over and prices willbegin moving in the opposite direction.Swing trading is an interesting price-based technique, and ifyou are able to keep an eye on price movement from day to day, it
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is an action-packed and exciting method for speculating in the market. Using options also makes swing trading far easier for most people, compared to transacting in long or short positions using sharesof stock.Whether you use options as pure speculation within your portfolio, or in a more conservative vein (covered call writing, for example), option trading is complex and may come with many dangers.The range of trading strategies covers the entire spectrum from highrisk to very conservative, so it is crucial to study and understand themarket before embarking on any one strategy. Simply knowing theactual risk is an important step in trading options and, in fact, forany other type of strategy.You can learn a lot about options by studying the informationon the option industry’s Options Clearing Corporation (OCC) Website, which can be accessed at www.optionsclearing.com. This siteoffers a free copy of the prospectus for the options industry, ‘‘Characteristics and Risks of Standardized Options,’’ as well as manyother free products and services including access to education onoptions. You may also check the Chicago Board Options Exchange(CBOE) at www.cboe.com. The CBOE provides educationalcourses as well as free option quotes, data and statistics, detailedexplanations of various strategies, an online options bookstore, andtheir own training and educational courses. Both the OCC andCBOE Web sites are valuable resources to expand your knowledgeof the options market.The next chapter moves the discussion of alternative investingstrategies to a related and important topic, market timing. By looking for methods to analyze current market conditions, you can improve the timing of buy or sell decisions and thus improve overallperformance and proﬁtability in your portfolio.
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C H A P T E R
1 1
MARKET TIMING
E
veryone has heard that success in the market means buying lowand selling high. Ironically, many investors do the opposite, becausemarket action is more often than not determined by greed and fear.Investors become greedy at market tops and buy more shares andbecome fearful at market bottoms and bail out.After considering the building blocks presented in precedingchapters, an astute investor analyzes conditions for a speciﬁc stockto determine if or when to take action in the market. Timing shouldbe based on an analysis of earnings and proﬁts; the requirementsfor diversiﬁcation as qualiﬁed by application of Charles Dow’s ideas(which are, essentially, programmed trend analysis models); testssuch as volatility (price as well as fundamental); and a careful studyof the P/E ratio trend.
Buy Low, Sell HighThe best-known stock market maxim, ‘‘buy low, sell high’’ soundsobvious and trite. But actually, it is quite profound when you realizethat many investors do just the opposite. The market is governed by197
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two emotions: greed (on the upside) and fear (on the downside).The way that many investors and traders make decisions is alsoemotional and lacks the calm, analytical approach that invariablyleads to better timing of decisions. In fact, the contrarian (an investor who goes against the majority) takes advantage of the usualmarket tendency, buying when everyone else is selling and sellingwhen everyone else is buying. Put the contrarian model in a different light and consider the emotional aspects. While the crowd emotionally reacts and overreacts to changes in price, the contrariantakes a step back, analyzes what is going on, and times decisionswithout emotion.The classic investor mentality is reactive but blind. When pricesare rising the typical investor wants to jump in, buying shares inaccelerating stocks to get in on the action. This greed tends to accelerate as stock prices reach a peak, meaning that more and moreinvestors and traders buy at or near the top. Why do stocks stoprising and turn around? That is the question. The reason is that atsome point, the price inertia runs its course and demand saturates.Buying demand no longer keeps up, simply due to the fact that allof the buyers have taken positions. At this point the wise traderknows it is time to take proﬁts, and selling pressure replaces buyingpressure. Aggravating this situation, short sellers also recognize thatthe top is at hand and they begin to sell the stock, which furtheraccelerates the selling action. Those traders who acted out of greedand entered long positions near the top invariably end up losing,because prices begin to fall. They ignored the advice to ‘‘buy low’’and instead decided to ‘‘buy high.’’ This sequence repeats itself overand over.The same thing happens at the bottom. When investors andtraders take up long positions in stock, they almost always assume(and believe) that their entry price is zero and that the stock mustrise from that point onward. This ignores the reality that prices goup and down. When prices fall signiﬁcantly the greed response isreplaced, often very quickly, by the fear response. As prices fall,sellers fuel the drop but at some point, all long position sellers haveexecuted trades. At the very bottom, an accelerated level of sellingcauses a lot of activity. At this point, investors on the sidelines rec-
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ognize a bargain price and a buying opportunity and they begin tobuy. Buying demand replaces the selling activity, and is made evenmore extreme as short sellers cover their positions with more buyorders. Those investors who operate out of fear sell their stock atthe worst possible time. Instead of following the advice to ‘‘sellhigh,’’ they do the opposite; they ‘‘sell low.’’The net outcome of this greed-and-fear mode is that many traders end up with a ‘‘buy high, sell low’’ approach, the opposite ofwhat they should be doing. But taking the advice to ‘‘buy low