Everyone wants killer investment advice that will make them millions of dollars. The buy low sell high strategy claims to do just that.
But does it really work?
We’re going to break it down into easy mode, explaining exactly what buy low sell high means and why the general idea works.
But we’ll also go a step further, exploring situations when buying low and selling high isn’t the best idea, highlighting that investing isn’t always as simple as it seems.
Dive in and discover how buy low sell high can help you win at investing, if you do it the right way.
What Does Buy Low Sell High Mean?
“Be Fearful when others are greedy and be greedy when others are fearful.”
-Warren Buffett
This famous quote by Warren Buffett is the perfect breakdown of the buy low sell high strategy.
It means you should buy stocks when the market is down and sell them when it is up.
The “others” Buffett mentions include the general public, investors, and market speculators. When these folks are being “greedy,” they buy thousands of stock shares, over-inflating the value.
Prices go up, and the shares aren’t always worth the high price. When prices soar beyond the real value of an investment, you should be fearful. You don’t want to buy when the prices are high and over-inflated.
When investors are fearful, they sell all their shares, and because these shares flood the market, prices drop drastically.
The dramatic price drop creates unique buying opportunities. Now is the time to be greedy because you can scoop valuable shares up at bargain prices.
How Does Buy Low Sell High Work?
The strategy works because you’re buying stocks on sale. Everyone sells when the market crashes, and investments generally take a downturn. That means you can purchase shares of great companies at highly discounted prices.
When the dust settles and the markets start to rise again, your investments will grow with them.
The price per share will increase, and you will make money on your growing investment.
Buy Low Sell High Works With All Investments
The buy low sell high investment strategy applies to all investment classes, not just stocks. Those who purchased real estate during the 2008 market crash saw massive gains with the soaring market that followed.
Investors in niche classes, such as commodities and physical assets, can also turn a profit following this general rule.
How Do I Buy Cheap and Sell High?
I know you were waiting for the massive catch, and here it is. Buying low and selling high isn’t as easy as it sounds.
How do you know whether people are acting emotionally out of fear, or if they know a company is going under? How can you tell whether a cheap stock is a good deal, and how do you know when to sell it again to make a profit?
These difficulties showcase why the buy low sell high is fantastic as a general rule, but doesn’t always work as a solid investment strategy.
The Limitations of Buying Low and Selling High
Investors must consider four primary limitations of the buy low, sell high strategy before diving in:
- Timing the Market
- Investment Timeframe
- Insolvent Companies
- Risk Tolerance
Timing the Market
Never try to time the market. That’s the first, most fundamental rule of investing for long-term wealth.
The biggest limitation of the buy low sell high strategy is that it forces you to try to time the market.
For most investors, that’s a mistake. You can never know when the market will bottom out or when it will hit its peak.
Tons of people rushed to sell high in March 2020 when the market was at its “peak.” The market proceeded to hit record highs for months after that. Anyone who sold stock during that March “peak” missed that growth.
It’s impossible to predict will the market will go next, meaning it’s impossible to know when to buy and sell.
However, when used as general advice, it helps keep you grounded and reminds you not to panic sell during a downturn.
Investment Timeframe
The buying low and selling high strategy does not consider anyone’s investment timeframe. Should you sell stocks in your retirement account when you are thirty because the market is high?
That doesn’t make a lot of sense when you still have thirty years on the horizon to build wealth.
It’s also hard not to sell at a low point when you rely on investment income to survive. Those already retired may be unable to ride out the lows without selling.
It’s vital to consider your individual investment goals and overall financial situation before jumping into any investment strategy to ensure it will meet your needs.
Insolvent Companies
Sometimes there’s a reason why company stock prices crash. Not all individual stocks that go low will recover.
If you had used this advice to buy Circuit City before it went under, you’d have lost your entire investment.
At the same time, thousands of penny stocks are on the market for incredibly low prices. The odds that any one of these low-value companies will blow up to be big winners are not good.
Buying “low” on penny stocks will result in owning a bunch of low-value companies, and you will likely lose money in the long run.
Risk Tolerance
The buy low, sell high investment strategy doesn’t take risk tolerance into consideration.
Not everyone can handle intense market swings, and that’s okay. If you can’t stomach lows, you probably don’t want to invest in the stock market when it’s bottoming out. You’d have to buy shares when you think the market is at its lowest and hope those share prices don’t fall even further.
As it’s impossible to know when the market will reach the bottom, your investments will likely continue to drop.
Seeing money drain from an investment account is gut-wrenching for even the most stoic investors, so buying low isn’t for those who can’t handle the risk.
What Should I Do Instead?
Instead of relying on buying low and selling high to build wealth, consider two better strategies: dollar cost averaging and index fund investing.
Then, ignore the hype about market highs and lows.
Dollar Cost Averaging
The biggest problem with the buy low sell high strategy is that it makes people try to time the market, which is nearly impossible, even for the savviest investors.
Instead, try dollar-cost averaging, a strategy where you set aside a certain amount of money each month (or paycheck, etc.) to buy without paying attention to market volatility.
Sometimes you will buy when the market is above average, and sometimes you will buy it when it’s below average.
Over time, it averages out.
Index Fund Investing
Unless you’re an experienced investor who constantly consumes financial news and obsessively checks each company’s balance sheets and fundamentals, index funds are the best choice for your investment.
Index funds give you automatic diversification across sectors, have low fees, and usually automatically reinvest any dividends you earn so your investments can grow even more.
My favorite company for index fund investing is Vanguard* – they have a total market fund that tracks the entire stock market. A total market fund gives you all the diversification you could want in one accessible fund, so you don’t have to worry about buying and selling. In my opinion, it is one of the best investments for beginners.
*I have no affiliation with Vanguard outside of being a customer.
Avoid the Hype
Investing is a long-term wealth-building strategy. There are no get-rich-quick shortcuts.
Open a brokerage account, set up automatic payments, and forget about it.
Unless you need the money, ignore the media’s fear-mongering. Instead, talk with a financial advisor about your financial goals. They can help you decide when to withdraw (or move money to less volatile investments). Ensure your financial advisor serves as a fiduciary, meaning they have a legal requirement to serve your best financial interests.
It may not be exciting, but slow and steady wins the wealth-building race.
Is Buy Low Sell High Bad Advice?
Buy low sell high has its place. The rule helps ground people so they don’t panic when their investments drop or buy a ton of overvalued shares in a hyped-up market.
It’s not bad advice, because it can prevent people from making colossal investment mistakes, but it’s said without any nuance.
As a rule of thumb, it’s solid advice. However, buy low sell high isn’t an investment strategy. That’s a critical difference a lot of people don’t consider.
When it comes to something as important as your money and financial future, it’s always best to speak with a qualified professional and ignore all the hype on the internet.