The reason why people who buy when the Nikkei Stock Average rises and sell when it falls will never consistently win

Do you know people like this around you?

When the market rises and the news gets lively, they say, “I’ll start too,” and when the market crashes and pessimism floods SNS, they drift away, thinking, “Investing is scary, I’ll quit.” Perhaps that person is you.

To those who are caught in this pattern, please hear a few painful truths.

Buy high, sell low. As long as you repeat this behavior, no matter how good the stocks you choose or how correct your investment theories are, your assets will not grow. Rather, the market, a colossal system, will use your emotions to steadily siphon off your precious money.

Why do so many people fall into this “loser’s cycle”? And how can we break free from it? Today I will write about that as deeply and honestly as possible.

Why emotions are the greatest enemy of investment

The human brain has evolved over tens of thousands of years. Its most adept decision-making is for “survival in this moment.” If a wild beast appears, you run. If others around you start running, you run too. This instantaneous reaction was an essential ability for human survival in primitive times.

But in today’s financial markets, this instinct becomes your greatest weakness.

When stock prices surge, the sensation of “I mustn’t miss out” that you feel watching the surrounding frenzy comes from the same neural circuitry as when the herd rushes in prehistoric times. The fear of missing out, called FOMO, is an impulse deeply etched in our brains through evolution and cannot be erased.

Conversely, when prices are crashing and the screen shows deep red numbers, the fear you feel is the same instinct that detects danger and makes you flee in primitive times. The amygdala signals “danger,” temporarily suppressing the functioning of the prefrontal cortex, which governs thinking. In other words, during a crash, our brains are literally driven into a state where we cannot think clearly.

Understanding this structure is the first step in fighting emotions in investing. When you feel “scared” or that you don’t want to miss out, if you realize that this is not a rational judgment but an ancient instinct at work, you can create a small distance from those emotions.

The irrationality of humans revealed by behavioral economics

Daniel Kahneman and Amos Tversky, who studied investor behavior at the crossroads of psychology and economics, proved for decades that humans systematically make erroneous judgments in investing. Their work culminated in the Nobel Prize in Economics and is known as “Prospect Theory.”

Among the findings of this theory, the most directly affecting to investing is the “loss avoidance bias.” Humans feel pain from losses about 2 to 2.5 times more strongly than the pleasure of gains.

The joy of a 1,000,000 yen profit and the pain of a 1,000,000 yen loss are not psychologically the same size. Losses feel much larger. This asymmetry distorts investors’ behavior.

When you have unrealized losses, you either choose to cut losses to end the pain or hold on forever, terrified that the losses will be realized.

Ironically, many individual investors choose the worst timing in this two-choice pattern. It is common to cut losses near the bottom when the market is falling and you think you’ve reached your limit. And those who hold on because “it’s scary to realize the loss” often don’t sell even when there is no real prospect of recovery, causing losses to snowball.

The phenomenon of the “disposition effect” has also been clearly identified. People tend to sell winning positions too early and keep losing positions for too long. From a rational standpoint, this is the opposite behavior: letting profitable positions go and keeping unprofitable ones deteriorates the portfolio’s quality.

These behavioral biases are not limited to especially foolish people. Investors around the world harbor the same biases to varying degrees. The problem is whether you know about them. If you know, you can pause a moment when you feel yourself being swept by emotion.

What goes on in the head of those who buy at high prices

From 2020 to 2021, many people in Japan began investing for the first time. The rapid market recovery after the COVID-19 shock and the need to manage assets in a low-interest environment led to record-breaking numbers of new brokerage accounts.

But many who started investing at that time experienced tough times in the subsequent downtrend.

Why? Because many began after seeing news that “stocks are rising.” When stocks are rising, many people have already bought. Jumping in at that point is like trying to enter a venue that is about to run out of seats.

There is a Wall Street adage in the world of markets: “A bull market is born in pessimism, grows in skepticism, matures in optimism, and dies in euphoria.” As this proverb shows, many individual investors want to buy at the stage from optimism to euphoria. This paradox of emotion causes the greatest risk when you want to buy the most.

FOMO fear is real. When you hear that others are making money, you feel you are the only one losing. SNS is full of posts like “I earned 3,000,000 yen with this stock.” But there are few posts of people who lost 3,000,000 yen. The survivorship bias makes the market look rosier than it is.

That illusion leads those who bought at high prices to experience the next downturn with the thought, “This wasn’t supposed to happen.” That experience then leads to the fear that investing is scary and that they should stop, resulting in the worst outcome of selling at the bottom.

What goes on in the head of those who sell at low prices

In March 2020, during the COVID-19 crash, many people sold stocks. The Nikkei index fell below 20,000, and headlines proclaimed “the worst decline since the Lehman Brothers shock.”

Imagine the hearts of those who sold at that time.

Every day when you open your account, you see your paper losses growing. Starting with a 1,000,000 yen loss, it expands to 2,000,000 yen, then 3,000,000 yen. Sleepless nights follow. The fear of “what if it goes further down” sticks in your head. There is a heaviness in not being able to tell your family about your investment.

And when the limit is reached, you sell saying, “I can’t endure this anymore.”

The moment you sell, strangely your heart becomes a little lighter. The losses are realized, but you gain a sense of relief that it won’t go lower than this.

Yet later the market recovered rapidly. Those who sold watched the recovery with a clenched fist of regret, which now becomes a different form of pain.

Many who experienced this “selling at the bottom” repeat the same mistake in the next upturn. Fearing missing out again, they buy at high prices. And in the next downturn, they sell again. This repetition is the “loser’s cycle.”

Those who fall into the loser’s cycle mechanically repeat the worst pattern: buy whenever the market rises and sell whenever it falls. Meanwhile, prudent investors buy low and sell high, steadily moving wealth from emotional investors to calm investors.

The cruel arithmetic: to recover 50% loss, you need 100% gain

There is a harsh truth about investment math that many people intuitively fail to grasp.

If a 1,000,000 yen asset falls 50% to 500,000 yen, what percentage gain is required to return to the original 1,000,000 yen?

To recover a 50% loss, you don’t need a 50% gain. You need 100% gain, i.e., double it.

To turn 500,000 yen into 1,000,000 yen, you need a 500,000 yen gain. A gain of 500,000 yen on a 500,000 yen asset is a 100% return.

This asymmetry is the essence of why losses are so terrifying. A 10% loss requires about 11.1% gain to get back. A 20% loss requires 25% gain. A 50% loss requires 100%, and a 70% loss requires 233% gain.

Understanding this arithmetic helps explain why Buffett has said, “The first rule of investing is not to lose money; the second rule is not to forget the first rule.” It is far more important, for long-term wealth-building, to minimize losses than to maximize gains.

Panic selling is especially dangerous for this reason. Selling in a crashing market out of fear locks in large losses. The return required to recover those losses becomes larger than what was lost. If you fall into a deep hole, it can take years to claw your way out.

A mindset shift from “price” to “value”

A patient investor looks at value, not price.

Many think, “Prices are rising, so I want to buy,” or “Prices are falling, so I feel scared.” But with this thinking, you are always at the mercy of your emotions.

Value-oriented investors ask a different question: “What is the intrinsic value of this company? Is the current price above or below that?”

Prices change every day, sometimes every minute. But the value of a company—the total cash flows it will generate in the future—does not change so easily.

When the stock price of a good company crashes, did its value change? When the Nikkei fell 30% in March 2020, did the essential value of Japan’s good companies decrease by 30%?

Most of the time, the answer is no. Prices fell because investors’ fear caused selling, not because the business value of the company changed. That divergence is a “buying opportunity” for value investors.

Buffett’s remark, “Be fearful when others are greedy, and be greedy when others are fearful,” expresses this thinking of exploiting price-value divergence. When others rush to buy in frenzy, prices exceed value; when others dump fearfully, prices fall below value.

However, in reality, it is extremely difficult to accurately calculate the value of individual companies. For this reason, for many individual investors, a more practical approach is diversified index investing with long-term regular contributions, rather than stock picking. When the whole market is crashing in fear, assuming that the global economy’s value does not plummet as drastically is a practical stance.

Having your own rules is the only solution

The only way to invest without being swayed by emotions is to never change the pre-set rules while the market is moving.

Investing without rules is like sailing without a compass. You’re carried by the waves, and you don’t know where you’re headed. And when a storm hits, without a standard to stay on the right course, you are forced to rely on emotional judgments.

Examples of rules include clearly stating your investment objective and time horizon. Write down what this money is for and until when you won’t use it. For retirement, at least 20 years. Even if that asset temporarily falls 30%, if it recovers 20 years later, the goal is still met. With a clear purpose, you don’t need to react emotionally to short-term declines.

Next, automate the regular contributions. If you set up automatic monthly withdrawals, you won’t decide to stop contributions just because this month’s market is down. The system prevents emotional intervention. Even when prices are crashing and you are buying cheaply, emotion might tempt you to stop; automation prevents this worst pattern.

And it’s also useful to decide how often you will check your account. Checking every day exposes you to daily price fluctuations that shake your emotions. Setting a rule to check only once a month or once a quarter helps you focus on meaningful trends rather than noise.

The mindset to win in a market where 90% lose

In investing, there is a harsh statistic: 90% of investors underperform the market average. Among individuals, even fewer consistently profit over the long term.

Why do so many people lose so much?

Because the market functions as a mechanism that transfers wealth from emotional investors to calm, rational investors.

The people who sold in fear pick up the stocks at low prices later, and the people who bought in frenzy at high prices are sold by those who take profits calmly. This transfer happens every day in the market.

Saying 90% lose implies that 10% win. The common traits among that winning 10% are not special knowledge or talent, but “not being driven by emotions” and “following rules.”

An important question arises: Is “not being driven by emotions” the same as “not having emotions at all”?

No. It’s natural to feel fear when you see a crash and to feel a rush when you don’t want to miss a rally. There is no need to deny these feelings.

What matters is to separate feeling from acting on those feelings. It’s natural to feel scared, but don’t sell. It’s natural to fear missing out, but don’t buy at high prices. This separation is at the core of a long-term investor’s mindset.

Protecting compounding is the ultimate strategy

The greatest strategy Buffett, revered as a god of investing, has practiced for decades is not to break the chain of compounding.

Compounding gets stronger with time. If you invest 1,000,000 yen at an annual return of 7%, after 10 years you have about 1,970,000 yen, after 20 years about 3,870,000 yen, and after 30 years about 7,610,000 yen. The most important factor is not the high return of 7% but continuing the chain of compounding for 30 years.

However, every crash you panic-sell breaks this chain repeatedly. Once broken, even if you reconnect it, you cannot recover the lost compounding. If a major loss in year 10 requires three years to recover, effectively only about seven years of compounding have functioned.

Emotional investors break the compounding chain with every rough market swing, gradually depriving themselves of its benefits. On the other hand, investors who stick to the rules and stay in the market experience crashes but preserve compounding and reap long-term rewards.

The paradox that “doing nothing” can yield the greatest returns comes from here. After buying, if you do nothing and simply remain in the market, that can lead to better results than repeated buying and selling. This is one of the most counterintuitive yet crucial truths in investing.

What will you do when the next crash hits

As you read this, the market may be calm. But the next crash will come. Historically, major downturns occur roughly every decade or so, sometimes more frequently.

What will you do then?

If you follow your emotions, you will sell out of fear and regret the recovery later.

But you who read this article have a different option.

When a crash comes, notice the signal your brain sends to “run.” That signal is honest. But remember that it is an ancient primal instinct, and in modern financial markets it is often a misleading signal.

And while feeling that emotion, execute the pre-set rules. Keep contributing. Keep holding. Even if you avert your eyes from the account values, you must follow the rules.

That accumulation of experiences of “scary but not moving” builds the mental resilience of a long-term investor.

Investing is a battle with yourself. The market continually tests your emotions. Wealth steadily moves from those who surrender to emotions to those who conquer them.

When the next crash comes, remember what this article said. And while feeling fear, verify your contribution setup. Do not change it. Do not touch it. Doing so alone can help you avoid many of the mistakes people make.

Sticking with it to the point of boredom is the strongest weapon of long-term investing.