Everyone is looking for that killer investment advice that will make them millions of dollars. Let me introduce you to one that works: Buy Low Sell High.
Maybe you’ve heard this saying before, but we’re going to break it down and discuss what it means, how you can utilize this strategy in your investment portfolio, and talk about times when it might not work.
So are you ready to get started with a killer investment strategy? Read on and reach your investing goals!
What Does Buy Low Sell High Mean?
“Be Fearful when others are greedy and be greedy when others are fearful.”
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” Buffet mentions in this quote include the general public, investors, and market speculators. When these folks are being “greedy,” they buy thousands of stock shares, over-inflating their value.
Prices go up, and frequently the shares aren’t worth what people pay. 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 market forces are fearful, they sell all their shares, and because these shares flood the market, prices drop drastically.
The dramatic drop in prices creates unique buying opportunities. Now is the time to be greedy because you can scoop these shares up at lower prices.
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How Does Buy Low Sell High Work?
This 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 scoop up some 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 Investment Classes
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 made huge gains with the soaring market that followed.
Investors in niche classes, such as commodities and physical assets, can also make money following this general rule.
How Do I Buy Cheap and Sell High?
Unfortunately, the strategy isn’t as easy as it appears.
Finding cheap stocks everyone fears is challenging, and knowing the right time to sell is impossible.
These difficulties showcase why 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.
- Timing the Market
- Investment Timeframe
- Insolvent Companies
- Risk Tolerance
Below we will dive deep into each, showcasing why it’s a limitation.
Timing the Market
One of the first rules of investing in the stock market is that you never want to try to time the market. The buy low, sell high strategy forces you to do just that.
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 the March “peak” missed that growth. It’s impossible to predict will the market will go next.
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 grow your investments.
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 in on an investment strategy.
Also Read: 15 Points to Consider for your Financial Plan
Sometimes there’s a reason why certain companies are low. If you had used this advice to buy Circuit City before it went under, you’d have lost your entire investment. Not all individual stocks that go low will go back up.
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 these low will result in owning a bunch of low-value stock, and you will likely lose money in the long run.
The buy low, sell high investment strategy fails to consider anyone’s risk tolerance.
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?
There are three strategies you can implement instead of relying on buy low, sell high. These include dollar cost averaging, investing in index funds, and ignoring the hype.
Dollar Cost Averaging
The biggest problem with this advice is that it leads to people trying to time the market, which is nearly impossible.
Instead, try dollar-cost averaging. With this strategy, you set aside a certain amount of money to buy shares every month (or paycheck, etc.) 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
Stick to investing in index funds unless you are an experienced investor who reads up on the fundamentals of each company and knows everything about their balance sheets.
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 Vangaurd 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 fear-mongering of the media. Instead, talk with a financial advisor about your financial goals and plan when you should start withdrawing (or moving money to less volatile investments).
It may not be exciting, but slow and steady wins the race regarding investing.
Is Buy Low Sell High Bad Advice?
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. The advice prevents 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, and that’s an important difference.
When it comes to something as important as your money and financial future, it’s always best to speak with a qualified professional.
Melanie launched Partners in Fire in 2017 to document her quest for financial independence with a mix of finance, fun, and solving the world’s problems. She’s self educated in personal finance and passionate about fighting systematic problems that prevent others from achieving their own financial goals. She also loves travel, anthropology, gaming and her cats.