Buy low and sell high sounds like great investment advice. If we are able to consistently invest when prices are low and sell when prices are high, we will not only never lose money, but we’ll also become extremely wealthy.
The obvious problem with this investment advice is that if it is so easy to execute, there would be a lot more Warren Buffets and Charlie Mungers around.
Problems With A Buy Low, Sell High Investment Strategy
While it may be easy to say what is high and what is low on hindsight, it is impossible for many of us to determine that today.
Timing the market is next to impossible.
# 1 What’s Considered High On One Day, May Be Low On Another Day
Below is the share price chart of DBS Group. The two circles indicate a share price of close to $21. In the first occasion, it was obviously a “high” price. DBS shares reached a high of $21.38 in July 2015 and subsequently tanked to under $14 at the start of 2016.
Fast-forward one and a half years, it reached the previously “high” price of $21.68 in July 2017. However, this was obviously a “low” price on this occasion, as its shares went on to peak at close to $30.00 in April 2018.
Source: Yahoo! Finance
# 2 We Are Emotional Creatures
When markets are on a bull run, we tend to be more confident to invest more. Similarly, when faced with a bear market where prices are tanking, we get scared about making any new investments.
This leads to a situation where we actually avoid buying when markets are low and continue investing, rather than selling, when markets are high. The complete opposite of the buy low, sell high strategy.
We may have the best investment plans in the world, but when we see everyone else making a lot of money, we get greedy, and when we see our portfolio bleeding, we get very nervous.
# 3 Economic Situations
It is counter-intuitive to buy at the “low” and sell at the “high”.
Typically, a recession brings about bear markets. While this may be the exact moment to buy at the “low”, it is also when people may become fearful of losing their jobs or see their earning power diminish. During these testing moments, everyone will be rushing to sell their investments rather than think about putting more money in.
Conversely, during economic booms, people can find jobs more easily, and may even receive more substantial pay raises and see business opportunities. This is when markets will trend at its “high”, causing everyone to put more money into their investments.
# 4 Spread Between The High And Low
Simply buying a stock for $10.00 and selling it for $10.05 fulfils the buy low, sell high strategy, but most people would probably end up losing money on the investment. This is because of transactional costs we incur when buying and selling.
When we buy low, and sell high, we need to catch the markets at its lows and offload investments just when they’re peaking. This means gaining a large upswing rather than hoping for a few percentage points increases.
While it may still work for some, especially traders, retail investors may not be savvy enough or have the time to monitor markets to capture such small price fluctuations.
How To Go About Determining Whether Prices Are High Or Low?
When we try to implement this strategy, the last thing we want to do is focus on whether prices are high or low today. We need to couple this strategy with more obvious ways to determine good investments.
# 1 Fundamental Analysis
By studying a company’s revenue, earnings, type of projects, financial ratios, management team, as well as news and economic outlook of the industry it is operating in, we can start to assess whether it is current overpriced or underpriced in the market.
This will help us to make a decision to buy at its “low” or sell at its “high”.
# 2 Technical Analysis
Traders monitor trading activities, such as price and volume charts of assets, to uncover statistical trends. They will then use these trends to determine whether it is on an upward trajectory, or at a “low” right now, or a downward trajectory, or at a “high” right now.
# 3 On The Ground Knowledge
This is when large investors become strategic investors in companies. This way, they have access to the company’s performance, management team and can work with the company on its future business strategies.
This way, they can better deem if the company is current trading at a “high” or “low” price.
Difficult For Retail Investors To Implement This Strategy
For retail investors, we encounter both issues – we have problems implementing the buy low sell high strategy and we also find it difficult to determine the “high and “low” prices.
What we can do for a start is look for viable options for us to start investing without having to time the market. This can include contributing to a monthly investment plan for blue chip stocks, investing in exchange traded funds (ETFs), such as Singapore’s Straits Times Index (STI) ETF, or even saving in the Singapore Savings Bonds.