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Everyone is looking for that killer investment advice that will make them millions of dollars (do you really need that much though?). Let me introduce you to one that actually works: Buy Low Sell High. Maybe you’ve heard this saying before, but we’re going to break it down and discuss what it actually 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 that you should buy stocks when the market is down, and you should sell them when the market is up.
The “others” that Buffet is referring to in this quote is the general public, investors as a whole, and market speculators. When these folks are being “greedy”, they are buying up thousands of shares and over-inflating their value. Prices go up, and oftentimes the shares aren’t exactly worth what people are paying for them. This is the time that you should be fearful. You don’t want to buy when the prices are high and overinflated.
When they are being fearful, they sell all their shares, and because these shares flood the market, prices drop drastically. This is when you should be greedy because you can scoop these shares up and lower prices.
How Does Buy Low Sell High Work?
This strategy works because you’re basically buying stocks on sale. When the market crashes and stocks in general take a downturn, everyone is selling. 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 rise with them. The price per share will increase, and you will make money on your growing investment.
How Do I Buy Cheap and Sell High?
And here’s the rub – it’s never as easy as it would first appear. How do you find those cheap stocks that everyone is fearful of? How do you know when the time is right to sell them?
And this is why buy low, sell high, although a great rule of thumb, doesn’t actually work as a solid investment strategy. There are far too many variables and limitations. Let’s explore those.
The Limitations of Buying Low and Selling High
Timing the Market
One of the number one rules of investing in the stock market is that you never ever want to try to time the market. The buy low sell high strategy forces you to do just that. The problem is that you never know when the market will bottom out, and you never know when it will hit its peak.
Tons of people rushed to sell high last March 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.
The buying low and selling high strategy does not take anyone’s investment timeframe into account. Should you sell stocks in your retirement account when you are thirty years old 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 to not sell at a low point when you are relying on investment income to survive. Those who are already retired may not be able to ride out the lows without selling.
Sometimes there’s a reason why certain companies are low. If you had used this advice to buy Circuit City right before they went under, you’d have lost your entire investment. Not all individual stocks that go low will go back up.
At the same time, there are thousands of penny stocks on the market for super 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 more than likely lose money in the long run.
Another limitation of using this advice is your risk tolerance. If you’re someone who can’t stomach lows, you probably won’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, then hope that those share prices don’t fall even further. Buying low isn’t for those who don’t like risk.
What Should I do Instead?
The biggest problem with this advice is that it leads to people trying to time the market. That’s nearly impossible to do. Instead, try dollar-cost averaging. This means that you set a certain amount of money aside to buy shares every month (or paycheck, etc.) without paying any 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.
Next, unless you are an experienced investor who reads up on the fundamentals of each company and knows everything about their balance sheets, stick to investing in index funds. These give you automatic diversification across sectors, have low fees, and usually automatically reinvest any dividends that you earn so that 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. This gives you all the diversification you could want in one easy fund, so you don’t have to worry about buying and selling, and in my opinion, is one of the best investments for beginners.
Finally, don’t get caught up in the hype. Investing is a long-term wealth-building strategy. There are no get-rich-quick shortcuts. Open up a brokerage account, set yourself up with automatic payments to it, and forget about it for a while. Unless you need the money, ignore the fear-mongering of the media. Instead, talk with a financial advisor about your financial goals and make a plan for when you should start withdrawing (or moving money to less volatile investments).
It may not be exciting, but when it comes to investing, slow and steady really does win the race.
Is Buy Low Sell High Bad Advice?
Buy low sell high isn’t bad advice overall, but remember it isn’t actually an investment strategy. It’s a rule of thumb. The entire point of this saying is to prevent people from panic selling during a bear market when their investments look like they are dropping. It’s also meant to prevent people from buying shares during a bull market when stocks are overvalued. Its basic advice meant to prevent people from making huge investment mistakes, but it’s said without any nuance.
As a rule of thumb, it’s solid advice. But as far as investment strategies go, it could use some work.
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.