Many ASX investors have sold shares on Friday or today. Perhaps both. How do we know? Well, the S&P/ASX 200 Index (ASX: XJO) doesn't fall 2.1%, as it did on Friday, or 2.7%, as it has so far today, without some serious selling pressure.
Unfortunately, ASX investors, like investors in any country, are influenced by a herd mentality. That means that if other people are buying shares and pushing up the markets, we are collectively inclined to follow their lead.
But this also works in reverse. If other investors are selling, most of us are at least tempted to join the stampede out of the share market and into the arms of cash. You know, before the markets drop any further and you lose even more money.
Following the crowd can give one a sense of security – how can so many people be wrong? And at least if you lose money, everyone else is suffering too.
However, the reason we all entrust our hard-earned savings to the whims of the share market is to build wealth.
We need only look to the wealthiest investors to see that those who make the most money from stock market investing are the ones who go against the crowd. No one sums up this mentality better than the legendary Warren Buffett.
ASX shares: Buy low, sell high
Buffett is one of the only richest people in the world who has gotten to where he is by prudent investing. Most of the others have made their fortunes from building a single business that specialises in providing a particular service or set of services. That includes people like Elon Musk, Jeff Bezos and Mark Zuckerberg.
But Buffett has largely built up Berkshire Hathaway by investing in other businesses. So his wisdom on this matter is invaluable.
One of the central tenets of Buffett's investing strategy is buying stocks when everyone else is selling.
Here's a quote from Buffett's 1997 letter to the shareholders of Berkshire Hathaway. This, I think, sums up his attitude quite well:
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices…
So smile when you read a headline that says 'Investors lose as market falls'. Edit it in your mind to 'Disinvestors lose as market falls — but investors gain'. Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.
Foolish takeaway
So, there are probably more than a few ASX investors today who are examining the markets and preparing to sell the shares in their brokerage accounts.
Hopefully, if that's you, you haven't already done so. Your decisions are your own, of course. But I would tell anyone who is (understandably) feeling nervous about what is going on in the stock market right now to ask themselves this: 'What would that billionaire investor Warren Buffett do right now?'.
Buffett wouldn't be selling his shares just because everyone else is. In fact, he would probably be the one buying the shares others are selling. Don't be the person who helps the investors who are following Buffett's advice.
